
Class _ru:2_L!lL 



.5" 



Goipght'N?^. 



COFntlGHT DEPOSIT. 



INTRODUCTION TO 
ECONOMIC PROBLEMS 



BY 

JAMES DYSART MAGEE, Ph.D. 

ASSOCIATE PROFESSOR OF ECONOMICS 
NEW YORK UNIVERSXry 



CHARLES SCRIBNER'S SONS 

NEW YORK CHICAGO BOSTON 



CJ^I J 2- ?--^ 



\^ 






Copyright, 1922, by 

CHARLES SCRIBNER'S SONS 

A 



PRINTED AT 

THE SCRIBNER PRESS 

NEW YORK, U. S. A. 



MAR I0rd22 
0)C!.A659102 



PREFACE 

This book was written to provide a text for the second 
semester's work in Introductory Economics. This work 
is designed to follow a study of the elementary principles 
of Economics, which is usually given during the first semes- 
ter of a year's course in Economics. It is designed par- 
ticularly to follow Turner's Introduction to Economics. 

The need has arisen for a book which treats economic 
problems from two points of view: (i) to illustrate and en- 
force the economic principles studied in the first course; 
(2) to provide up-to-date facts and discussions of the eco- 
nomic problems concerning which the student should de- 
velop opinions. The war together with recent legislation 
have made it necessary to rewrite much of the material on 
economic problems. 

After each chapter, exercises are provided. Some of the 
questions are intended to test the care with which the stu- 
dents have read the text. Others of the questions are de- 
signed to be the basis of discussion. Still others of the 
questions are meant to suggest the wider aspects of the 
problems. 

It has been my aim to present the common opinion of 
economists rather than to strive for originality. 

My obhgations to others are great. First, I owe much 
to my teachers: J. L. Laughlin, Thorstein Veblen, H. J. 
Davenport, R. F. Hoxie, L. C. Marshall, J. A. Field, C. 
W. Wright, A. C. Whitaker, A. S. Johnson, and John Cum- 
mings. Second, much is due to those whose text-books I 



iv Prejojce 

have used: R. T. Ely, A. S. Johnson, Alfred Marshall, F. 
W. Taussig, 11. R. Seagcr, W. II. Hamilton, and F. A. 
Fetter. Third, my colleagues, Willard Fisher, R. L. 
McClung, A. L. Faubel, and lOugone Greidcr, have helped 
me with jiarticular chapters. I'^inally, Dean J. R. Turner 
has given at all stages most heli)ful suggestions concern- 
ing the general plan and the methods of presentations of 
the separate problems. 



CONTENTS 



CHAPTER I 

PAGE 

The Study of Economic Problems i 

I. What Arc Economic Problems? 2. The Relation of Eco- 
nomic Problems to Business Prol)lems. 3. Reasons for the Study. 

4. The Truth vs. Propaganda. 5. The Difficulties of the Econ- 
omist. 6. The Joys of the Economist. 7. The War and Eco- 
nomic Problems. 8. Attitude toward Conclusions. 9. Exer- 
cises. 

CHAPTER II 

Productive Capacity 8 

I. The Factors in Productive Capacity. 2. Mining. 3. 
Agriculture. 4. Lumber. 5. Manufactures. 6. Transporta- 
tion. 7. Business Management, 8. The ItlTcct of the War on 
Productive Capacity. 9. Exercises. 

CHAPTER III 
Marketing 20 

I. The Problem of Marketing. 2. The Functions of the 
Middleman. 3. Salesmanship and Advertising. 4. Methods of 
Marketing Farm Products, 5. The Chicago Board of Trade, 
6. Speculation and Hedging. 7. The Marketing of Securities. 
8. The New York Stock Exchange. 9. Speculation in Stocks. 
ID. Retail Dealers in Groceries. 11. Other Types of Retailers, 
12, Types of Wholesalers. 13. Wholesale Consumption. 14. 
Organization for Marketing in Foreign Countries. 15. Exer- 
cises, 

CHAPTER IV 
Cycles in Trade and Industry 58 

I. The Course of Cycles. 2. The Periodicity in Business. 3. 
Mitchell's Theory of Business Cycles. 4. Rising Prosperity, 

5. Development of Stresses. 6. Crisis and Panic. 7. Depres- 
sion. 8. Mitigating the Crises. 9. Exercises, 



vi Contents 

CHAPTER V 

PAGE 

The Operation of the Federal Reserve System . . 72 

I. The Weekly Statement. 2. Cash Items — Operation of the 
Gold Settlement Fund. 3. Bill Holdings — Trade Acceptances. 

4. United States Bonds and Certificates. 5. The Banking- 
House. 6. The Collection System. 7. The Capital Liabilities. 
8. Deposits — Services for the Government — Mobilization of Re- 
serves. 9. Notes of the Banks. 10. Other Liabilities — Earn- 
ings. II. The Reserve Ratios. 12. The Discount Policy of the 
Federal Reserve Board. 13. The Aid to Foreign Trade. 14. 
Summary of Benefits of the System. 15. Exercises. 

CHAPTER VI 

Socialism 94 

I. The Problems of the Distribution of Wealth. 2. Utopian 
Socialism. 3. The Theoretical Basis of Socialism. 4. Socialist 
Criticism of the Present Order. 5. Consideration of the Criti- 
cism. 6. Socialist Proposals. 7. The Socialist Party. 8. Guild 
Socialism. 9. Exercises. 

CHAPTER VII 
Labor Organizations 107 

I. The Wage Bargain. 2. The Aims of Trade-Unions. 3. 
Types of Unions and Federations. 4. Collective Bargaining. 

5. The Strike. 6. The Boycott, the Union Label, and Other 
Activities. 7. The Open and the Closed Shop. 8. Trade-Union 
Leadership. 9. Employers' Associations. 10. Arbitration and 
Conciliation. 11. The Kansas Industrial Relations Court. 12. 
Organized Labor and the War. 13. Exercises. 

CHAPTER VIII 

Legal Regulation of Conditions of Employment . 129 

I. The Reasons for Regulation. 2. Sanitation and Safety. 
3. Regulation of the Labor of Children. 4. Regulation of the 
Labor of Women. 5. Minimum Wage for Women and Children. 

6. Regulation of the Labor of Men. 7. Exercises. 

CHAPTER IX 

Life and Property Insurance 139 

I. The Function of Insurance. 2. The Insurable Risk. 3. 
The Moral Hazard. 4. Fire Insurance. 5. Other Property In- 
surance. 6. Life Insurance. 7. Exercises. 



Contents vii 

CHAPTER X 

PAGE 

Social Insurance . . . . ' 152 

I. The Need for Social Insurance. 2. Responsibility for 
Accidents Under the Common Law. 3. Employers' Liabil- 
ity Laws. 4. Workmen's Compensation Laws. 5. The New 
York Compensation Law and Other Laws. 6. Health Insur- 
ance. 7. Old-Age and Invalidity Insurance. 8. Unemploy- 
ment Insurance. 9. Exercises. 

CHAPTER XI 

Transportation 172 

I. The Place of Transportation in Economic Organization. 

2. Stages of Development of Internal Transportation in the 
United States. 3. The Development of the Technic of Railroad 
Transportation. 4. The Development of the Railroad Net in 
the United States. 5. Railroad Competition. 6. Railroad Rate 
Theories. 7. Classification of Freight. 8. Railroad Freight 
Tariffs. 9. Passenger Service and Rates. 10. Present Inland 
Water Transportation. 11. Early Merchant Marine and the 
Reasons for Decay. 12. Coastwise Shipping. 13. The War 
and Shipping. 14. The Panama Canal. 15. Exercises. 

CHAPTER XII 

Government Regulation of Railroads 198 

I. The Demand for Regulation. 2. The Scope of the Inter- 
state Commerce Act. 3. The Powers of the Interstate Com- 
merce Commission. 4. Procedure. 5. The Regulation of 
Rates. 6. The Long and Short Haul Clause. 7. The Commodi- 
ties Clause. 8. The Application of the Anti-Trust Law to Rail- 
roads. 9. Federal and State Regulation of Interstate Com- 
merce. ID. State Railroad Commissions and Regulations. 11. 
The Railroads and the War. 12. The Esch-Cummins Law. 13. 
Railroad Valuation. 14. Exercises. 

CHAPTER XIII 

Unfair Competition 230 

I. What Is Competition? 2. What Is Unfair Competition? 

3. The Federal Trade Commission and Unfair Competition. 

4. (a) Deceiving the Consumer. 5. (b) Coercing Middlemen. 
6. (c) Injuring Competitors. 7. (d) Misuse of Government 
Protection and Public Utilities. 8. Exercises. 



viii Contents 

CHAPTER XIV 

PAGE 

The Trust Problem 238 

I. What Is a Trust? 2. Causes for the Growth of Trusts. 
3. Minor Causes for the Growth of Trusts. 4. The Common 
Law About Combinations. 5. Forms of Combination. 6. Pools. 

7. The Trust in the Legal Sense. 8. The Holding Company, 
9. The Merger or Amalgamation. 10. The American Tobacco 
Company. 11. Exercises. 

CHAPTER XV 

The Control of Trusts 250 

I. The First Attitude of the Public. 2. The Evils of the 
Trusts. 3. State Legislation. 4. The Difficulties of State Regu- 
lation. 5. The Sherman Anti-Trust Law. 6. Early Effect of 
the Sherman Law. 7. The Later Decisions Under the Sherman 
Law. 8. The Seven Sisters Laws of New Jersey. 9. The Fed- 
eral Trade Commission Act. 10. The Clayton Act. 11. The 
Federal Trade Commission. 12. Difficulties in Regulating 
Trusts, 13. Exercises. 

CHAPTER XVI 
Foreign Trade and Foreign Exchange 263 

I. The International Division of Labor. 2. Trade Based on 
Natural Differences. 3. Trade Based on Differences in Eco- 
nomic Development. 4. Trade Based on Specialization. 5. 
The Meaning of Foreign Exchange. 6. The Demand for and 
Supply of Foreign Exchange. 7. Mint Pars and Gold Points. 

8. The Balance of International Payments. 9. The Correctives 
of the Exchanges. 10. Arbitrage, il. Exchange Rates with 
Countries on a Paper Standard. 12. Exchange Rates with 
Countries with a Silver Standard. 13. The Gold Exchange 
Standard. 14. The Regulation of Gold Movements. 15. The 
Effect of the War on the Exchanges. 16. Dollar Exchange. 17. 
Exercises. 

CHAPTER XVII 

Tariffs and Foreign Trade Policies 285 

I. What Is a Tariff ? 2. Technical Terms of a Tariff. 3. The 
Effect of a Tariff on Imports. 4. Revenue Tariffs. 5. Protec- 
tive Tariffs. 6. Free Trade vs. Protection. 7. The Course of a 
Tariff Bill in United States. 8. The Political Evils of a Tariff. 

9. The History of the Tariff in the United States, Illustrating the 



Contents ix 

PAGE 

Arguments Used. lo. The Tariff Commission, ii. The Present 
Discussion. 12. The Problem of Dumping. 13. The Tariff and 
the Debts Owed Us by Europe. 14. Discriminations and Unfair 
Competition in Foreign Trade. 15. Reciprocity Treaties. 16. 
Colonial Preference. 17. The Open Door. 18. Exercises. 

CHAPTER XVIII 

Public Finance . 306 

I. The Scope of Public Finance. 2. The Sources of Public 
Revenue. 3. Government Borrowing. 4. Justice in Taxation. 
5. Rates of Taxation. 6. The Incidence of Taxation. 7. Gov- 
ernment Expenditures. 8. The Budget. 9. Exercises. 

CHAPTER XIX 

Receipts and Expenditures or the Federal Govern- 
ment 323 

I. The Principal Sources of Revenue. 2. Financial Transac- 
tions of 1920. 3. War Profits-and Excess-Profits Tax. 4. The 
Federal Income Tax. 5. The Estate Tax. 6. Internal Revenue 
Duties. 7. Details of Expenditures. 8. The Problem of the 
Debt. 9. Revision of Taxation. 10. Exercises. 

CHAPTER XX 

Receipts and Expenditures of Cities and States . 337 

I. The Expenditures of Various Government Bodies. 2. The 
Finances of New York City. 3. The Receipts of New York City. 
4. The Expenditures of New York City. 5. The Receipts and 
Expenditures of Philadelphia. 6. The Receipts and Expendi- 
tures of State Governments. 7. The General Property Tax. 8. 
Corporation Taxes. 9. The Single Tax on Land. 10. State 
Income Taxes. 11. State Inheritance Taxes. 12, Exercises. 

Index 357 



CHAPTER I 

THE STUDY OF ECONOMIC PROBLEMS 

I. What Are Economic Problems? Facts Involved in Economic 
Problems. 2. The Relation of Economic Problems to Business Prob- 
lems. 3. Reasons for the Study. 4. The Truth vs. Propaganda. 5. 
Difficulties of the Economist. 6. The Joys of the Economist. 7. The 
War and Economic Problems. 8. Attitude toward Conclusions. 9. 
Exercises. 

I. What Are Economic Problems? — Economics is the 
science of wealth, and as such it is concerned with the 
principles which govern the production, distribution, and 
consumption of wealth. Economic problems have to do 
with the difficulties involved in the application of these 
principles to specific cases. We may recognize three broad 
divisions. First, some arise because men have to deal with 
each other. Thus, to a large extent, the labor problem is 
a matter of adjustment of personal relations in industry. 
Other problems have to do with the relations of men as 
competitors. Second, some arise out of man's dependence 
on natural resources. Thus, productive capacity is, to a 
great extent, dependent upon the resources of a country. 
Third, some problems arise in connection with the effort 
of the government to regulate industry and commerce. 
Thus, we have the problems of railroad regulation and the 
control of trusts. 

Facts Involved in Economic Problems. — There was an 
old idea that all human knowledge could be accurately 
divided, as land is divided, and that a certain area could 

1 



2 IntrodMction to Economic Problems 

be given to economics and other areas given to political 
science, ethics, psychology, chemistry, physics, zoology, 
astronomy, and numerous other subjects. The common 
expression "fields of knowledge" reflects this old idea. 
The economist was supposed to keep his hands off any 
facts not in his particular field. Our present view places 
no such limitation on the activities of the economist in 
dealing with economic problems. We start with some 
question, such as the price of cotton, and we find that we 
must consider boll- weevils, the chemistry of soils and fer- 
tilizers, the psychology of tenant-farmers, and many other 
matters. Anything which affects an economic problem 
may come within our survey. 

2. The Relation of Economic Problems to Business 
Problems. — The economic problem is a general problem 
and is studied from the point of view of the public welfare. 
The business problem is a particular problem and is studied 
largely from the point of view of private profit. Thus, the 
economic problem of the railroads deals, among other things, 
with the effect of transportation on economic development, 
the means for providing cheap and efficient transportation, 
and public regulation of railroads to insure equality of 
treatment to all shippers. To the board of directors of a 
railroad the business problem is how to develop traffic for 
their railroad and how, living up to all of the laws and 
regulations prescribed, to conduct their business in such a 
way that they will have money to pay interest on their 
bonds and dividends on their stocks. Or, again, the eco- 
nomic problem of labor deals with such things as the sup- 
ply of labor, the conditions under which labor is performed, 
and the general aspects of the determination of wages. 
The business man as an employer thinks of the labor prob- 



The Study of Economic Problems 3 

lem in terms of costs; how can he hire and supervise his 
labor so that he can produce at a cost which will enable 
him to sell at a profit? 

3. Reasons for the Study. — The justification of our study 
of economic problems is found in the absolutely funda- 
mental character of economic conditions and in the desire 
to be good business men and good citizens. 

All civilization must have a material basis. We must 
be fed and clothed before we can enjoy any of the so-called 
"higher things." We have seen, in some of the European 
countries, the ghastly results which follow the breakdown 
of the economic organization. We wish to prevent such an 
occurrence in this country. 

The good business man must understand the general eco- 
nomic problem before he can solve his own particular busi- 
ness problem successfully. In the old days of a simple 
local economic organization, a business man, by mere ob- 
servation, might become aware of most of the factors that 
entered into his problem. But now we have an economic 
organization which is almost inconceivably complex, and 
which embraces, in many of its aspects, the whole world. In 
such a complicated situation the business man who relies 
on mere observation is sure to leave out many important 
factors. And even if he does consider most of the factors, 
he may not be able to interpret them correctly. 

All may not intend to be business men, but all are citi- 
zens. The government is assuming an increasing control 
over economic activity. This control has great possibili- 
ties for good or for harm. The results will be good if the 
voters, in deciding on general policies, and the legislators, 
in drafting specific laws, make their decisions on the basis 
of an adequate analysis of the economic problems involved. 



4 Introduction to Econmnic Problems 

4. The Truth vs. Propaganda. — The economist in study- 
ing economic problems is seeking to find the truth. He 
gets all of the facts possible and from these facts he draws 
his conclusions. The propagandist, too often, begins with 
his conclusions and selects only those facts which help 
him in his propaganda. We are not condemning all propa- 
gandists. They are useful in getting things done, if they 
happen to start propaganda for something which needs to 
be done. But we must never forget the difference in their 
point of view and that of the economist; we must be on 
the lookout for propagandists who masquerade as scientists. 

5. Difficulties of the Economist. — The methods recog- 
nized in science are experiment, observation, and compari- 
son. The physical sciences, such as chemistry, use experi- 
ment. In the experiment the scientist controls the con- 
ditions. If he wishes to know the effect of hydrochloric 
acid on zinc, he gets pure acid and pure zinc and puts them 
together. Then he records the result, and that experiment 
need not be done again. The economist cannot usually 
experiment, as he cannot control the conditions. Perhaps 
he would like to try a central bank in the United States. 
He cannot start the bank privately. He must persuade 
Congress to do it. Some experiments are too costly either 
in money or in human life to be tried. 

Other scientists can quote authorities for the facts they 
take as the basis of their reasoning. The economist must 
always be on his guard. Statements found in print may 
be mere propaganda; they may be based on incorrect rea- 
soning, or they may have been correct at the time and in 
the place they were written, but have no application at 
the present time. Thus, there is no justification for the 
quotation of Mill's opinion on the eft'ect of the introduction 



The Study of Economic Problems 5 

of machinery, which was based on conditions in England 
in 1848, as if it had any bearing on conditions in the United 
States at the present time. 

Because he cannot experiment, the economist must rely 
on observation and comparison. In applying these methods 
the difficulties arise from the intricate complexity of eco- 
nomic phenomena. Thus, prosperity and depression are 
the result of numberless interacting causes, and it is almost 
impossible to assign the exact degree which some one fac- 
tor contributed to prosperity or depression. Usually we 
must be content to discover whether the factor helped or 
hindered prosperity. 

The historian has an easier time than the economist; 
the historian can get at documents, which, at the time, the 
economist may not even have known about. No tanta- 
lizing delay is experienced in getting the statistics needed 
for history. 

6. The Joys of the Economist. — In spite of these diffi- 
culties the economist has his joys. He is dealing with real, 
alive, present-day people. He is helping to lay the basis 
for all that is good in social development. There is no 
dull monotony of unchanging conditions. He has variety 
enough to make his life very spicy. 

7. The War and Economic Problems. — The war deranged 
the economic organization of the world. It altered the 
relations of the factors of production. It disrupted lines 
of trade. It destroyed much capital and killed or maimed 
many laborers. Reconstruction presents grave problems, 
many of them economic, which must be solved if civiliza- 
tion is to persist. 

The war, then, has presented economic problem in urgent 
form. It has also aided in the general solution of the prob- 



6 Introduction to Economic Problems 

Icms. 'I\) one depending on llie methods of observation 
and comparison, new conditions and rapid changes are 
desirable. The war brought many new conditions and 
changes rapid enough to suit any one. These changes 
throw thi' prol)lems in striking rehef. In orcHnary times 
it is hard to gel i)eople lo reah/e the effects of rising i>rices. 
liut no one couhl be .so stupid as not to have observed the 
edects of the doubling of prices during war times. 

Then again, many new things were tried during the war. 
We had more governmental interference in business than 
ever before. When we get the facts, no doubt many in- 
teresting things will be learned from the experience of 
Russia with communism. During and aftc-r the war, there 
have been heretofore uni)aralleled expansions of bank credit 
and paper currency. In taxation, experiments were tried 
with exce.ss-protils taxes and steej)!)' progressive income 
taxes. 

8. Attitude toward Condusions. Our conclusions cannot 
be stated so absolutel)' as those in Economic Theory. 
There, with the premises carefully laid down and the logic 
rigorously correct, we may announce our conclusions with 
ct)nridence. In our study of luonomic Problems we must 
be more modest. Our conclusions are tentative. They 
are the best that we can reach on the basis of the facts we 
have at present. We recogni/e that the conclusions may 
need to be revised if (he underlying conditions change, or 
if wi- come into i)ossession ol ni>w facts. 

Q. Exercises, i . Suggest differences in the point of 
view of the econt)mist and the entomologist in studying 
the boll-weevil or the greenbug. 

2. How much does the business man consider public 
welfare? 



The Study of Economic Problems 7 

3. Does it pay for the business man to consider public 
welfare ? 

4. Contrast the tariff as an economic problem and as a 
business problem. 

5. Indicate precisely the relation of economic activity 
to the development of painting and music. 

6. Show how the success of the New York banker may 
require knowledge of conditions all over the world. 

7. How does the adoption of the initiative and refer- 
endum affect the need for the study of economic problems? 

8. State the attitude of the propagandist to truth and 
to facts. 

9. Supposing that the economist were all-powerful, out- 
line a series of experiments to decide the best form of rail- 
road control in the United States. 

10. Why be an economist? 

11. Make a list of the ways the war affected the factors 
of production. 

12. How did the war affect private property? 

13. What caution is needed in arguing from war-time 
experiences ? 

14. Why cannot we be absolutely sure of the conclusions 
we reach concerning economic problems? 



CHAPTER II 
PRODUCTIVE CAPACITY 

I. The Factors in Productive Capacity. 2. Mining. 3. Agricul- 
ture. 4. Lumber. 5. Manufactures. 6. Transportation. 7. Business 
Management. 8. The Effect of the War on Productive Capacity. 
9. E.xercises. 

I. The Factors in Productive Capacity. — Productive ca- 
pacity is of vast importance to the welfare of a nation, for 
upon it the people depend for the goods and the services 
which make Ufe possible and pleasant. We may state in 
general terms conditions which make a country productive. 

First, the natural resources must be varied and abundant : 
agriculture demands rich land with a varying degree of 
heat and moisture; mining requires deposits of minerals so 
situated that they can be easily worked; transportation is 
facihtated by natural waterways and a topography that 
permits easy railroad construction. 

Second, the people must be able and willing to work. 
They must have bodies endowed with physical strength, 
minds which apply the strength, and the moral qualities 
of faithfulness and honesty in work. 

Third, the people in working with the resources must be 
aided by machines and equipment and directed so that 
the best methods will be used and the skill of each worker 
utilized to the best advantage. A short-time considera- 
tion of productive capacity might be made on the basis of 
the assumption that the equipment of society can be taken 
as fixed. A longer discussion would consider the possi- 
bilities of exhaustion of resources and changes in the edu- 

8 



Productive Capacity 



cation of the people and the number and efficiency of 
machines which they use in production. 

2. Mining. — We shall try to illustrate some of the pos- 
sible meanings of productive capacity by statistics. For 
example, we might take productive capacity in the sense 
of the materials which furnish a potential supply. Thus, 
in the following table is given what might be called the 
potential supply of coal. 

ESTIMATES OF HIGH-GRADE COAL AT MODERATE 
DEPTH » 



Amount in Thousands of Millions or Tons 



World 4,400 

United States 1.975 

Canada 286 

China 995 

India 79 

Siberia 67 



Germany 410 

Great Britain 190 

Russia 58 

Austria-Hungary 45 

France 16 

Belgium 11 



' Eckel, E. C, Coal, Iron and War, pp. 111-114. 



It is interesting to contrast with this table the amounts 
of coal actually produced. 

COAL PRODUCTION FOR 1916 IN SHORT TONS 2 



Amount in Thousands of Millions of Tons 



World 1,401,000,000 

United States. . . . 590,098,175 

Canada 14,461,678 

China . '. 24,000,000 

India 19,324,826 

Germany 272,099,000 



Great Britain 287,110,153 

Russia 28,962,724 

Austria-Hungary. . 50,801,602 

France 23,670,000 

Belgium 16,458,816 



• Finlay, J. R., Cost of Mining, p. 84. 



We notice that the United States heads both lists; that 
is, it has the greatest potential supply of coal, and actually 



10 



Introduction to Economic Problems 



produced in 191 6 more coal than any other one country. 
But frequently there does not seem to be any particular 
connection between the rank in potential supplies in coal 
and the annual production. Thus, China, which ranks 
second with reference to potential supply, is far down in 
the list with reference to annual production, and Great 
Britain, which is second in actual production of coal, ranks 
rather low with reference to potential supply. Another 
consideration which must be borne in mind in talking about 
supplies of things such as coal is that they are wasting 
assets. Once used, our coal supply is gone. Our present 
industrial organization is based primarily on coal, but our 
experience and development of the past would make it 
dangerous to predict that no new source of power will not 
in the future take the place of coal. After all, some may 
object to our analysis so far on the ground that it seems to 
depend too much on the accident of the location of political 
boundaries. We may prefer to test productive capacity in 
the coal-mining industry by the amount of product per man. 



TONS OF COAL PRODUCED PER ANNUM PER PERSON 
EMPLOYED! 



Years 


United 
Kingdom 


United 
States 


Australia 


New 
Zealand 


Canada 


1 886-1 890 

1891-1895 

1896-1900. . . . 

1901-1905 

1906-I9IO. . . . 
1908 

1909 

iqio 


312 
271 
298 

281 

275 
271 
266 

257 
260 

244' 


400 

444 
494 
543 
596 
538 
617 
618 

613 
660 


333 
358 
426 

437 
462 
500 
388 
449 
485 
542 


359 
388 
441 

474 
470 
478 
456 
478 
487 
503 


341 
375 
457 
495 
439 
422 
400 
453 
395 
472 


IQII 


IQI2 





> Barker, J. Ellis, Economic Statesmanship, p. 192. 



I Year of strike. 



Productive Capacity 



11 



Obviously, the greater productivity in the United States 
is to be attributed mainly to the richness of our natural re- 
sources and to the excellent equipment with which the 
miner works. Besides, the miner's union has not been 
strong enough to limit output. 

3. Agriculture. — Next we may consider agriculture. For 
our first figures we may take the number of people engaged 
in agriculture. 

PERSONS ENGAGED IN AGRICULTURE' 



Year 



Country 



Number 



I9IO. 

1895- 
1900. 
19OI. 
1906. 
1907. 
1901 . 
1897. 
19OI . 



United States. . . . 

Argentina 

Austria-Hungary . 

British India 

France 

Germany 

Italy 

Russia 

United Kingdom . 



12,388,623 

385.323 
14,121,055 

90.893,575 
8,777.053 
9,723,472 
9,566,340 

15,782,669 
2,262,454 



' Year-Book of the Department of Agriculture, 1919, pp. 747-749. 

In one sense we might take the total area of the coun- 
tries as a possible supply of agricultural land, but it is 
probably better to take the area actually under cultivation. 
CULTIVATED LAND^ 



Year 



Country 



Number of 
Acres 



191O 

I909-I9IO. 
1910-1911 . 
I9IO-I9II . 

1910 

1900 

I9II 

I9II 

19II 



United States. . . . 

Argentina , 

Austria-Hungary . 

British India 

France 

Germany 

Italy 

Russia 

United Kingdom. 



293,794,000 
44,446,000 
61,450,000 

264,858,000 
59,124,000 
63,689,000 
33,815,000 

245,755,000 
17,862,000 



' Year-Book of the Department of Agriculture, 1919, pp. 747-749. 



12 



Introduction to Economic Problems 



We may take the number of horses in the country as in- 
dicating one of the factors of agricultural production. We 
are not justified in concluding that the same proportion 
of the horses in the country are used in agriculture; but, 
as the statistics do not distinguish between horses used on 
the farms and horses used in the cities, we are forced to 
take the total, 

HORSES IN THE VARIOUS COUNTRIES i 



Year 



Country 



Number 



I9IO. 
1914. 
19IO. 

1913- 
1917. 

1915- 
1908. 
1914. 
I918. 



United States. . . 

Argentina 

Austria 

Hungary 

France 

Germany 

Italy 

Russia 

United Kingdom . 



23,016,000 
8,324,000 
1,803,000 
2,005,000 
2,283,000 
3,342,000 
956,000 

22,529,000 
1,916,000 



' Year-Book of the Department of Agriculture, 1919, pp. 644-647. 

The figures for agricultural machinery are not available 
in terms of individual machines and the comparison by 
value would involve numerous difhculties. A significant 
item is that on December 31, 1918, in the United States 
there were 314,936 tractors on the farms. ^ 

It will be almost impossible to take the agricultural 
produce as a whole. We can, however, get figures for the 
production of separate crops, particularly wheat, as it is 
very widely produced. We take the average production 
over a period of time to eliminate the variations in crops 
which arise from the fluctuations in the weather. 



' Year-Book of the Department of Agriculture, 1919, p. 745. 



Productive Capacity 



AVERAGE PRODUCTION OF WHEAT FOR THE YEARS 
1909-1913 1 



Country 


Bushels 


Country 


Bushels 


United States 

Canada 


686,691,000 
197,119,000 
157,347,000 
156,523,000 
317,254,000 
522,794,000 


Spain 


130,446,000 
61,481,000 

4,976,000 
350,736,000 

7,885,000 


United Kingdom . . 

Netherlands 

India 


Argentina 

Hungary 


France 

Russia 


New Zealand 





^ Year- Book of Department of Agriculture, 1919, pp. 517-519. 

We may eliminate the accidents of size by giving the 
yields per acre. 

AVERAGE YIELD OF WHEAT PER ACRE, 1901-1910 2 



Country 


Bushels 


Country 


Bushels 


United States 

United Kingdom. . 

Netherlands 

New Zealand 

Sweden 

Germany 


139 

31-9 

330 

315 
27.6 

29.1 


Manitoba 

France 


18.2 

195 

17.8 

174 

II-3 

9-5 


Hungary 


Taoan 


India 


Russia 







' Year-Book of the Department of Agriculture, 1919, p. 24. 

The statisticians of the Department of Agriculture have 
constructed an index-number of productivity per acre of 
the cultivated area of the different countries on the basis 
of the six most important crops; namely, wheat, oats, rye, 
barley, corn, and potatoes. The average yield per acre 
for a number of years for the given crop is expressed as a 
percentage of the average yield for all countries. These 
index-numbers for the per-acre yield of the single crops are 
averaged to get the index-number for the country as a 
whole by weighting each crop or the index-number for 



14 



Introduction to Economic Problems 



each crop by the acreage devoted to that crop. Thus, 
loo would equal the weighted average of all the countries. 



INDEX-NUMBER OF PRODUCTIVITY PER ACRE IN 
AGRICULTURE » 



Country 


Index-No. 


Country 


Index-No. 


Belgium 

Netherlands 

United Kingdom . . 
Germany 


221 
190 
177 
169 
167 
137 
136 
136 


France 

Hungary 

United States 

Italy 

Roumania 

India 


123 

113 

108 

96 

94 
84 

75 
72 


New Zealand 

Japan 


Canada 


Argentina 

Russia 


Sweden 





> Year-Book of the Department of Agriculture, 1919, p. 733- 

It is noticed that the United States comes low in the 
list. However, we need to make the same inquiry as we 
did in the case of coal-mining. What is the production 
per man? One authority says that each American farmer 
produces 2.5 times as much as the individual in Belgium; 
2.3 times the individual in England; 3.2 times the individual 
in France; 2.5 times the individual in Germany; and 6.0 
times the individual in Italy.* 

In Belgium we get a high }ield per acre at a lower level 
of comfort. In the United States the unit per acre is lower 
(though not the lowest), but it is combined with a high 
level of comfort. We cannot indicate statistically the skill 
of the farmers in the United States; but we may consider 
the wide spread of agricultural education, the fact that 
we have more than sixty agricultural experiment stations, 
and the fact that agricultural machinery is widely used. 

* Year-Book of Department of Agriculture, 1919, p. 25. 



Productive Capacity 15 

Agriculture, if carried on in a scientific manner, does not 
exhaust the soil; so we may consider the figures as indicat- 
ing wliat may happen in agriculture for an indefinite 
period. 

4. Lumber. — The matter of lumber production is mid- 
way between mining and agriculture. Lumber comes as 
the result of growth of trees. In the United States the 
lumbering operations have, in general, been carried on in 
a way which results in the destruction of the forests. Eu- 
ropean countries have nearly all practised scientific for- 
estry, and they get what is called a crop of trees maturing 
each year. In the United States we have made a start at 
this sort of forestry. 

FOREST AREAi 

Forest Lands 
Country (Square Miles) 

United States 860,000 

United Kingdom 5,ooo 

European Russia 761,772 

France 36,000 

Germany 54,ooo 

Italy 15,437 

Austria 41,100 

Norway 26,900 

Sweden 90,241 

Japan, including Formosa 29,000 

5. Manufactures. — We have already given the statistics 
for coal, which, of course, is an extremely important factor 
to the development of manufactures. Perhaps the next 
most important material is pig iron, since it is the basis 
either of material for manufactures or the basis of the 
machines used in manufacturing. 

1 Smith, J. Russell, Industrial and Commercial Geography, p. 442. 



16 Introduction to Economic Problems 

ESTIMATED PRODUCTION OF PIG IRON IN THE 
WORLD FOR 1915 » 

Tons of • 
Country 2,240 Pounds 

United States 29,916,213 

Great Britain 8,793,659 

Germany 1 1,603,874 

France 4,000,000 

Russia 3,638,000 

Austria-Hungary 1,929,000 

Belgium 500,000 

Canada 825,420 

Sweden 755.ooo 

Spain 421,000 

Italy 389,000 

All others 500,000 

Total 63,271,166 

The primary horse-power used in manufactures in the 
United States in 1914 was 22,547,574 horse-power. 2 Of 
this total 1,826,443 horse-power was derived from water- 
wheels. It is interesting to compare this figure for water- 
wheels with the estimate made by Van Hise that in the 
United States the water-power resources could provide 
about 37,000,000 horse-power.' 

In the textile industries the best method of comparison 
is perhaps the number of spindles. In 191 2 Great Britain 
had 55,300,000 spindles; Germany had 10,700,000; the 
United States had 30,500,000; and British India had 
6,ioo,ooo.'* 

6. Transportation. — The natural means of transporta- 
tion which a country enjoys may be divided into the ex- 

• Metal Statistics, 1919, p. 51. 

-Abstract of the Census of Manufacturers, 1914, p. 491. 

' Conservation of Natural Resources in the United States, pp. 1 19-120. 

* Smith, J. Russell, Industrial and Commercial Geography, p. 487. 



Productive Capacity 



17 



ternal and internal; the external being the relation to the 
various oceans and seas and the principal harbors, and the 
internal being lakes and rivers which can be utilized for 
transportation. The number of steamboats in the vari- 
ous countries indicates the way in which countries use the 
external waterways. 

TONNAGE OF STEAM MERCHANT SHIPS OF 100 
TONS AND OVER IN JUNE, 1920 ^ 



Country 


Tonnage 


Country 


Tonnage 


United Kingdom . . 
British Dominions. 
United States. .... 
Japan 


18,110,653 
2,032,227 

14.574.375 
2,995.878 


France 

Italy 

Norway 


2,963,229 
2,118,429 
1,979,560 
1,773.392 


Holland 





' Federal Reserve Bulleiin, February, 1921, p. 186. 

Internal trade in most countries is carried on by the 

railroads. 

RAILWAY STATISTICS, 1913^ 



Country 



Miles of 


Locomo- 


Line 


tives 


244,418 


63,378 


19,722 


3,759 


14,217 


7,714 


2,554 


4,288 


10,821 


1,581 


29.304 


5,119 


606 


123 


25,314 


13,828 


38,154 


29,520 


8,481 


5.322 


5.473 


2,500 


40,360 


19,984 


9,291 


2.383 


8,806 


1. 95 1 


23,691 


24,718 



All Cars 



Miles of 

Line per 

100 Square 

Miles 



Miles of 

Line per 

10,000 

Population 



United States. . . . 

Argentina 

Austria 

Belgium 

Brazil 

Canada 

China (1912) 

France (1912) . . . . 

Germany 

Italy 

Japan 

Russia 

Spain (1912) 

Sweden (1912) . . . 
United Kingdom. 



2,445 

92 

167 

98 

20 

203 

3 

405 

757 

115 

49 

476 

52 

53 



,508 
,382 
i573 
718 
117 
443 
.285 
.824 
.194 
279 
,158 
316 
750 
154 
751 



8.52 

1.79 

12.50 

48.16 

0.47 
0.79 

12.22 

18.27 

9.90 

425 

0.60 

4-97 
5.68 

19-51 



' Bureau of Railway Economics, Comparative Railway Statistics, United States and For- 
eign Countries, 1913. 



18 Introduction to Economic Problems 

As a test of adequacy, the number of miles for the group 
of people is rather better than that for area. 

7. Business Management. — It is impossible to get sta- 
tistics which indicate the variations in management in the 
various countries. With reference to the United States we 
may urge that the numerous inventions of machines and 
new processes indicate good management. The develop- 
ment of "scientific management" is another indication of 
excellence in this field. We have developed various forms 
of combinations, particularly a corporate form. The de- 
velopment of accounting indicates one of the instruments 
by which management is made effective. The recent 
spread of higher commercial education will no doubt re- 
sult in more effective management of business. 

8. The Effect of the War on Productive Capacity.— 
Professor Bogart^ has estimated that 12,990,571 men lost 
their lives as the result of the war; that 629,244 were totally 
disabled as the result of wounds; and that 10,554,726 were 
partially disabled as the result of wounds. He estimates^ 
the property loss on land as $29,960,000,000 and the losses 
of shipping and cargo as $6,800,000,000. Much agricul- 
tural land was devastated in Belgium, France, Russia, 
Poland, Roumania, Serbia, Italy, and Austria. Many fac- 
tories and homes were destroyed. Railroads and bridges 
were put out of commission. Crops, cattle, agricultural 
implements, orchards, were destroyed. Coal-mines, iron- 
mines, oil-wells, were rendered useless. Forests were ruined. 

The human factor is probably the most serious. Besides 
the lessened efficiency of the wounded, the exposure of the 
war and the lowered standard of food consumption of whole 

' Direct and Indirect Costs of the War, p. 274. 
2 Ibid., pp. 284-288, 299. 



Productive Capacity 19 

populations will lessen the economic efficiency of the work- 
ers. Another aspect is serious. Many were killed who 
possessed special skill or who were important parts of busi- 
ness organizations. A long period may be required to 
replace them. 

9. Exercises. — i. Why are varied natural resources de- 
sirable ? 

2. Contrast the parts played by race and climate in 
making people industrious or lazy. 

3. Which was the more serious result of the war, the loss 
of equipment or the loss of laborers? 

4. How much attention should the business man give 
to the potential supply of raw materials in locating his 
business ? 

5 . Make a list of the various factors which might account 
for the differences in the yearly production of coal per 
person employed. 

6. Compute the percentage of the area of the United 
States which is under cultivation. What is done with the 
other land ? 

7. How do the yields of wheat per acre correspond with 
what you would expect from the Law of Diminishing Re- 
turns ? 

8. In planning our forestry policy, how much considera- 
tion should posterity receive? 

9. On what broad general factors does the permanence 
of the manufactures of a country depend? 

10. Which is more important for the productive capacity 
of a country, internal or external transportation facilities ? 

1 1 . Explain why Canada has so few railroads in compari- 
son with area and so many in comparison with population. 

12. What sort of statistics would you wish to have, if 
you desired to test the efficiency of the business men of 
two countries? 

13. How long will it take to restore the productive ca- 
pacity of Europe to what it was before the war? 



CHAPTER III 
MARKETING 

I. The Problem of Marketing. 2. The Functions of the Middle- 
man — Assembling — Storage — Assumption of Risk — Financing — Sort- 
ing, Packing, and Grading — Selling — Transportation. 3. Salesmanship 
and Advertising. 4. Methods of Marketing Farm Products. 5. The 
Chicago Board of Trade. 6. Speculation and Hedging. 7. The Mar- 
keting of Securities. 8. The New York Stock Exchange. 9. Specula- 
tion in Stocks — The Stock Exchange Clearing Corporation — Market 
Reports of Stocks, Bonds, and Money. 10. Retail Dealers in Groceries 
— Chain Stores — Mail-Order Houses— Department Stores — Co-opera- 
tive Stores — Public Markets — Company Stores — Retail-Wholesale 
Stores. II. Other Types of Retailers. 12. Types of Wholesalers — 
General Wholesale Markets — General Wholesalers — Specialty Houses 
— Catalogue Houses — Commission Houses — Co-operative Marketing 
— Auctions — Wholesale Branches. 13. Wholesale Consumption — Direct 
Sale — Organized Speculation — Raw-Material Merchants — Auctions. 
14. Organizations for Marketing in Foreign Countries. 15. Exercises, 

I. The Problem of Marketing. — Our complex division of 
labor is responsible for the problem of marketing; that is, 
the problem of getting goods from the producer to the con- 
sumer. In the earlier, simpler economic organization of 
society, often the producer and consumer were one. In 
other cases where they were different persons, they were 
still near enough to each other to make direct personal 
bargains. Now the producer and consumer are widely 
separated. The men who take charge of the process of 
getting the goods from the producer to the consumer are 
called middlemen. 

Marketing links itself with our study of price-making, 
since it is carried on by a series of purchases and sales made 

20 



Marketing 21 

at prices which are the result of the interaction of the forces 
of demand and supply. 

We must first understand the functions performed by 
the middleman in the process of marketing. Chief among 
these functions are: assembling, storage, assumption of 
risk, financing, sorting, packing, grading, selling, and trans- 
portation. 

2. The Functions of the Middleman. — (i) Assembling. — 
If we think of the problem involved in providing city- 
dwellers with eggs, we can understand the function of as- 
sembling. Eggs are produced on widely scattered farms, 
and must be brought together to be shipped and sold to 
the consumers. The problem of the wholesaler in the dry- 
goods trade is to assemble from various factories all of the 
things which the retailer may wish to buy. The retailer 
in turn assembles from various producers or other middle- 
men articles which the customer will wish to purchase. 

In New York City most of the small newspaper dealers 
get their papers from News Companies. Thus, the trouble 
of going around to all of the various publishers is avoided. 

In the aspect of assembling various different things cus- 
tomers may want, the mail-order houses with their gigantic 
catalogues probably stand first, with the department stores 
a close second. 

(2) Storage. — Storage is necessary particularly for sea- 
sonal products. Thus, apples are harvested in the summer 
and fall, and must be sold for the rest of the year. The 
storage function has developed particularly in connection 
with grain where vast elevators are utilized, and in con- 
nection with certain articles which require cool temperature 
to keep them in good condition where cold-storage plants 
have been developed. 



22 Introduction to Economic Problems 

(3) Assumption of Risk. — The middleman's risks are 
various. The price of the article may change in the in- 
terval between purchase and sale. The goods may be 
destroyed by fire. The quality of the goods may deteri- 
orate. The style may change. All of these are risks which 
occur in the process of getting the goods from the producer 
to the consumer, and the middleman ordinarily assumes the 
risk rather than the producer. The middleman also as- 
sumes the risk of bad debts. In case of destruction by 
fire it is possible to shift the risk to insurance companies. 
But this shifting involves the payment for the service. 

(4) Financing. — Ordinarily the financing is done by the 
banks, but it is one of the things which is arranged by the 
middleman, even if he does not himself actually provide the 
money. The producer often gets his money immediately 
after the goods are sold. Frequently the consumer does 
not pay for the goods until a considerable period after he 
has purchased them. In the interval, the middleman is 
either directly or indirectly furnishing the money. 

(5) Sorting, Packing, and Grading. — The retailer buys 
goods in large quantities and divides them into smaller 
quantities to suit the needs of the consumer. City-dwellers 
especially have no place to store large quantities of flour 
and sugar, and so the middleman breaks large packages 
and sells whatever amount is desired. The habit of buy- 
ing goods in packages has developed, and this enables the 
consumer to identify the goods as coming from a certain 
producer; and, on the whole, selling in packages is much 
more sanitary than the older method of sales in bulk. 
Grading and sorting is part of the essential function of 
standardization in marketing. Apart from standardiza- 
tion in weights, measures, and grading in quahty, trading 



Marketing 23 

would become a game of deceit and chance. Butter may, 
for example, be of varying degrees of goodness. It is the 
function of the middleman to sort the butter which he re- 
ceives into the various grades and to see to it that those 
who prefer the finest butter get it and those who are con- 
tent to eat the cheaper grades get those grades. 

(6) Selling. — In selling we think of the creation of new 
wants. The middleman is not content to take the demand 
situation as he finds it. He wishes to increase the demand 
for the particular article. This increase in demand may 
be brought about by advertising and by the use of sales- 
men. The activities of the clerks in the store are directed 
not only to supplying the things which the customers ask 
for, but also to suggesting things which they think the cus- 
tomer may be persuaded to purchase. 

(7) Transportation. — Transportation over the great dis- 
tances between producers and consumers is now a special- 
ized function, and it is taken over by the railroads and other 
companies. But here again the middleman is one who 
directs and pays for the transportation. And he directs 
and often carries on with his own equipment the transporta- 
tion from the store to the customers. After grading, the 
transportation problem is to have goods go as far as pos- 
sible toward the consumers before breaking bulk. 

We do not mean to imply that these functions will always 
be performed as they are at present. But somebody must 
do them. The trend of development seems to be in the 
direction of turning over more and more of the functions 
to the middleman. In the early days the consumer per- 
formed many of them for himself. The permanence of our 
present arrangements depends on whether we are willing 
to pay for the services. We may say there are two com- 



24 Introduction to Economic Problems 

modities, groceries delivered and groceries to be carried 
home. In each case the price is set by the forces of de- 
mand and supply. If people cease to be willing to carry 
groceries home, the demand for undelivered groceries will 
fail and so grocers will supply delivered groceries. 

3. Salesmanship and Advertising. — The older idea of 
salesmanship stressed the feature of skill in bargaining. 
The skilled salesman could sell anything to anybody (at 
least once). The newer idea is broader. The skilled sales- 
man is a specialist in marketing. His ideal is to get the 
goods at the time, in the place, and of the quality, desired. 
The sales department helps plan what will be produced 
and how it shall be marketed, including the advertising. 

We have seen that the fundamental factor in the demand 
for a product at all stages of the marketing process is the 
desire of the consumer. Thus, the clothing manufacturer 
sells to dealers but directs his advertising campaign toward 
the consumer. If the consumer desires the clothes, the 
dealer will be anxious to buy them from the manufacturer. 
Advertising aims to stimulate the desire for some com- 
modity. The use of a brand or a trade-mark facilitates 
the identification of the goods. In some lines the goods 
can be placed in trade-marked packages. The advertisers 
have developed methods of appeal by following psychologi- 
cal laws. They use a variety of mediums — newspapers, 
bill-boards, window displays, cards in cars, letters, circulars, 
and many other devices — but all with the purpose of creat- 
ing desire in the consumers. 

4. Methods of Marketing Farm Products.— We take the 
marketing of wheat as typical of the problems which arise 
in connection with the marketing of agricultural products. 
The farmer ordinarily sells his wheat to a grain buyer who 



Marketing 25 

represents a dealer in one of the big primary markets. A 
farmer may sell his wheat to a corporation formed by a 
group of farmers to undertake to carry on the process of 
marketing their own product. When the grain arrives in 
the market, it is graded, ordinarily, by state authority, some- 
times by boards of trades or produce exchanges, and some- 
times by the federal government. The graded wheat is 
then unloaded at an elevator, and an elevator receipt taken 
which calls for a certain amount of a definite grade of wheat. 
We may assume that the wheat is purchased by a miller. 
What he gets is the warehouse receipt. With this receipt 
he calls upon the warehouse company to deliver the wheat. 
He takes the wheat to the mill and grinds it into flour and 
the various by-products, such as cattle food. The flour 
may be sold to a jobber or wholesaler who sells it to the 
retailer to be sold to his customers to be utilized by them 
in the preparation of food, or it may be sold to a baker 
who makes bread, crackers, or other form of bakery prod- 
ucts which he sells directly to the consumer or indirectly 
through retailers. 

5. The Chicago Board of Trade. — ^We may take as typical 
of the produce exchanges the Chicago Board of Trade. It 
is the greatest market for wheat in the United States. It 
is an organization composed of 1,625 members, and deals 
in grains and provisions. Some of the things are sold for 
cash and immediate delivery, and in this case there are 
tables for samples of the commodities. Most of the trad- 
ing, however, consists in dealing in futures. Here we have 
the pits for the various grains. The pit has an arrange- 
ment which rises by steps from the floor, then goes down 
by steps into a pit. The purpose of this arrangement is 
to afford the greatest possible number of people a chance 



26 Introduction to Economic Problems 

to see each other. In the wheat-pit arc gathered the men 
who wish to buy or sell futures in wheat. They have de- 
veloped a sign-lan{:^uage by which they convey their bids 
and olTcrs. The wheat-i)it is the focus of the offers to buy 
and sell wheat from all over the country. The possibility 
of dealing in futures depends upon the grading of the com- 
modities. What are called the contract grades are Nos. 
I and 2 red winter; No. i northern spring; Nos. i and 2 
hard winter, and No. i velvet cha.fi. These are perfectly 
definite kinds of wheat with reference to quality and con- 
dition. So, any one may buy the wheat, even though he 
is not himself a judge of wheat. 

6. Speculation and Hedging. The speculation in futures 
usually concerns itself with the months just before the 
harvest or the time just after the supplies of wheat from 
the harvest in the southern hemisphere will be available, 
or the time when the harvest in this country is thoroughly 
complt'tetl. The effect of sjieculation on the produce ex- 
change is to make more even the price, and so to promote 
a more even consumption of the commodity throughout 
the year. 

Speculation in grain j)erforms a very useful function in 
permitting insurance. Suppose we have a miller who 
wishes to bid on a contract to furnish state institutions a 
certain quantity of Hour each month, lie might take a 
chance on the price of wheat at the various times through 
the year in which it would be needed. It might turn out 
that he would make more than his manufacturing prolit, 
but also he might make less. However, he can insure his 
manufacturing profit and eliminate the speculative risk by 
finding a speculator who will promise to deliver wheat to 
liini over the period of the contract at an agreed price. 



Marketing %1 

Hedging. — The following illustration is simplified and the 
margins taken in even cents for ease in calculation, but it 
gives the essence of the hedging transaction. We assume 
that a miller wishes to manufacture flour for which he has 
no customer. It will be sold in the market a month from 
the time he buys the wheat. Now the price of flour in all 
periods, except just preceding a harvest, follows fairly 
closely the price of wheat. In periods after the harvest, 
the future price of wheat and the cash price differ roughly 
by the costs of carrying the grain, such as the storage 
charge and the interest on the funds used to purchase the 
grain. We will assume that it costs i^ to carry a bushel 
of wheat for one month. We will assume that the cost of 
manufacture including the miller's profit is 2ff a bushel. 
The miller wishes to manufacture the flour without taking 
the risk which comes from the fluctuations in the price of 
wheat and flour, so he uses the speculative markets to 
hedge or to assume the risk. In December he buys the 
wheat to grind at, we may say, $1.20 a bushel, and at the 
same time he sells an equal quantity of wheat at $1.21 to 
be delivered in January. He grinds the wheat and in 
January has flour to sell. If market conditions have not 
changed, he sells his flour at $1.23 for the amount made 
from a bushel of wheat and buys the wheat to deliver on 
his future contract at $1.21 ; so he makes merely his milling 
profit. Suppose, however, the price of wheat in January 
is $1.26. He sells his flour at $1,28 and so makes $i^ a 
bushel extra profit, but he loses 5 ^ a bushel on each bushel 
of wheat he delivers on his speculative contract. Thus, 
his speculative gains and losses just balance, and he makes 
his milling profit. Suppose the price of wheat falls and 
in January is $1.16. In selling flour at $1.18 he loses s^ 



28 Introduction to Economic Problems 

on the amount made from a bushel. But he makes 5^ a 
bushel on his speculative wheat, receiving $1.21 for wheat 
he buys for $1.16. Thus again, his speculative gains and 
losses just balance and the miller makes his milling profit. 
Any expense in the way of commissions the miller charges 
up as insurance. The illustration shows the aptness of 
the use of the term "hedge," for the miller is betting on 
both sides of the market. 

The following clipping indicates the variety of things 
which influence the prices in the speculative markets and 
the commodities dealt in: 

ERRATIC MARKET IN GRAINS AT 
CHICAGO 



EXPORT ORDERS EXPECTED OVER SUNDAY FAIL TO MA- 
TERIALIZE AND WHEAT DROPS 



Special to The New York Times 
Chicago, June 6. — Action of the wheat market was 
most erratic. A break of i }4 cents early on rather gen- 
eral local selling was followed by a bulge of 2 cents on 
buying by Bartlett Frazier and others in the Snow re- 
port from Nebraska, which was construed as bullish, 
but Blum and other local professionals started to sell 
heavily and, with hedging by the J. Rosenbaum Grain 
Company against purchases in the Southwest, the mar- 
ket dropped 4@4}i cents from the high, touching 
$1.27 >^ for the July and $1.13^ for the September. 

The greater part of the news was of a bearish char- 
acter, and apparently some of the New York exporters, 
who bought futures Saturday, expecting liberal foreign 
acceptances over Sunday, sold out owing to the slow 
demand. That 500,000 bushels were reported as hav- 
ing been sold was responsible for the sharp advance 
toward the close that carried the July up 2K to $1.30 
at the last, while September was up 3 cents to $i.i6>^ 
and closed 34 cents higher for the day, though July was 
I yi cents lower. 



Marketing 29 

There was considerable selling of July and buying of 
September, part of it being an effort to hold up the 
July in order to make a market to sell on. Had it not 
been for the break in the foreign exchange, it is be- 
lieved that a liberal business in export wheat would 
have been done over Sunday, as American prices for 
deferred shipment are regarded as the lowest in the 
world, and cash wheat, f. o. b. The Gulf, for deferred 
loading, is about Chicago July price, plus the freight 
difference. 

At the inside figure today, July was off 14 j^ cents 
and September 9>^ cents from the high of last week, 
which many traders regarded as sufficient for the time 
being; but many of the local operators, who have been 
very bullish of late, are now over on the bear side, be- 
lieving that the crop reports are entirely too favorable 
for bulges to be maintained. The Kansas official re- 
port showed an increase of 900,000 acres over the pre- 
liminary returns and the total for the State is 10,000,000 
acres, but the crop estimate is unchanged at 1 1 5,000,000 
bushels, or the same as shown in May. Recent rains 
and cool weather in the Southwest have resulted in 
excellent filling, and harvest started in some sections 
of Kansas today and will be on in Southern Indiana by 
the end of next week. Premiums on spot wheat here 
were easier, with red Winter leading, showing as much 
as 2 cents under Saturday. 

Receipts of corn today aggregated 1,001 cars, of 
which around 750 cars were delivered on to-arrive con- 
tracts. The lack of pressure of cash grain was a sur- 
prise to the specidative trade, who sold early on the 
large receipts and were forced to cover later, making a 
close Vs, cent higher for the day. The country has 
ceased to offer corn in volume, due to the press of field 
work. Local public elevator stocks increased only 
210,000 bushels the last week, as large shipments partly 
offset the amounts taken into store. Export sales of 
250,000 bushels of corn were reported at the seaboard, 
but there were no bids here. Oats finished }i @ j/i cents 
lower, with trade largely of a local character. 

In the visible supply there was a reduction of 900,000 



30 



Introduction to Economic Problems 



bushels of wheat, making the total 8,334,000 bushels, 
against 9,234,000 the previous week and 38,259,000 
last year. Corn increased 3,745,000 bushels, and is 
18,848,000, against 15,103,000 the previous week and 
2,679,000 last year. 

Primary arrivals of wheat for the day of 1,983,000 
bushels, compared with 1,158,000 bushels last year; 
week ago, a holiday. Shipments were 1,042,000 bush- 
els; last year, 685,000. 

Corn receipts were 1,748,000 bushels; last year, 
1,108,000, and shipments, 1,061,000 bushels; last year, 
314,000. 

Today's Chicago prices for the principal commodi- 
ties were as follows: 

WHEAT p^^^ 

High. Low. Close. Close. 

July $1.32.^ $i.27X $1.30 $i.3iK 

Sept 1. 17/^ 1-13/^ I.i6>^ 1.15K 

^^'^^ Prev. Last 

High. Low. Close. Close. Year. 

July (>s'A MH -65 -64 >4 i.9i>^ 

Sept 66% .6sH .O5H .65K i.57>^ 

°^^^ Prev. Last 

High. I-ow. Close. Close. Year. 

July 40}i .393^ .391^ .397-^ .96>i 

Sept 4ipi .41 .41 .4i>^ .78fi 

^^'^'^ Prev. Last 

High. Low. Close. Close. Year. 

July i.25>^ 1.21^4 1.21^4 i.25y4 2.03>^ 

Sept i.o6>^ 1.03 1.03 1.05K i-85>< 

PROVISIONS p^^.^ Last 

Lard — High. Low. Close. Close. Year. 

July 9.70 9.65 9.67 9.72 20.65 

Sept 10.00 9.97 9.97 10.00 21.50 

Ribs- 
July 9.90 9.85 9.90 9.90 18.07 

Sept 10.10 10.07 10.07 10.10 18.85 

Pork- 
July 17.10 17.00 17.00 17.30 38.45 



Marketing 31 

7. The Marketing of Securities. — Governments and 
corporations furnish the supply of securities, and investors 
furnish the demand. The middlemen consist of under- 
writers, bankers, and brokers. The marketing problem is 
rather different from that of commodities because of the 
intermittent character of the supply. A corporation does 
not exist to create securities (eliminating, of course, the fake 
oil and gold-mining companies). The sale of securities is 
an incident to the starting of the business or the increase 
in the scope of its operations. 

Another difference is what might be called the durable 
character of the securities. Most of the sales on the Stock 
Exchange are resales. "Second-hand" stocks do not suf- 
fer the same depreciation found in "second-hand" clothes 
or other commodities. 

Low-grade securities are those with great risk and prom- 
ised high return. They are sold to those who wish to take 
a chance and also to the inexperienced and gullible. The 
sales talks and advertising hold out wonderful promises, 
alas ! too rarely fulfilled. The securities are often sold by 
the promoters of the enterprise. 

High-grade securities are the result of sounder financing. 
In the case of large corporations, they are almost always 
handled by investment bankers. In some cases the cor- 
poration raises new capital by offering to its shareholders 
the right to subscribe, at an attractive price, to a certain 
amount of the new stock. 

An investment banker, or, in the case of larger issues, a 
syndicate, buys the issue of securities or agrees to take any 
not subscribed for by the public. In this way he assumes 
the risk of the transaction. The investment banker also 
performs the assembling function. He provides the in- 



32 Introduction to Economic Problems 

vestor with the type of security he wishes with respect to 
safety, denomination, duration, character of the business, 
etc. The investor relies on the investigation made by the 
investment banker to obtain information about the securi- 
ties. The banker does not guarantee the securities, but 
his recommendation is given great weight by investors. 

8. The New York Stock Exchange.— The New York 
Stock Exchange is an illustration of an extremely highly 
organized market. It is an unincorporated association of 
i,ioo members. Technically the membership is called a 
seat on the exchange, although there are no seats on the 
trading floor. The stock exchange deals in stocks and 
bonds which are listed on the stock exchange. The proc- 
ess of listing involves a certain minimum amount of pub- 
licity with reference to the condition of the company and 
certain precautions as to the form of the certificates and 
the registration and transfer which are aimed to make it 
safe to deal in the stocks and bonds of the company. In 
the stock exchange are brought together from all over the 
country the bids and offers of the buyers and sellers for 
these listed stocks and bonds. The members of the stock 
exchange are ordinarily called brokers, and they take orders 
from their customers to buy or sell. Some of the members 
of the stock exchange speculate on their own account. 
These brokers have offices and branches in various parts of 
the country, from which they receive orders by telephone 
or telegraph or cable. On the floor of the exchange are 
twenty posts. All of the stocks are allocated to these posts. 
In making the division, the aim is to have the active stocks 
separated. If a broker has an order to buy certain stock, 
he will go to that post and there will presumably find a 
broker who wishes to sell the stock. 



Marketing 33 

9. Speculation in Stocks. — There are no dealings in 
futures in the stock exchange. In general the two classes 
of speculators are called the bulls and bears. The' bulls 
are those who think that the prices of stocks are going to 
go higher. The bears are those who think that the prices 
of stocks are going to go lower. We may illustrate the ac- 
tivities of the speculator from both standpoints. Suppose 
a person thinks that the prices of stocks are going higher. 
Obviously then, in order to make a profit it is necessary 
to buy stocks and sell them later at the higher price. Ordi- 
narily, a transaction is carried on by the purchaser putting 
up with the broker a certain sum of money which is called 
a margin. This margin is usually about 10 per cent to 
20 per cent of the price of the stock. The broker adds to 
this margin some of his funds and borrows from the bank 
the remainder of the money necessary to make the pur- 
chase of the stock. If all goes well and the price of the 
stock goes up, then the customer orders the broker to sell. 
The broker, from the proceeds of the sale, pays off the loan 
at the bank, takes out the amount of money which he ad- 
vanced and the interest on both sums, and returns to the 
customer the balance. It will be seen that this enables 
the customer to carry about five to ten times as many shares 
as he could carry if he were forced to pay the full cost of the 
stock. Of course, if things do not go as he expected, it 
means that he loses five to ten times as much as he would 
if he had bought the stock outright; but most speculators 
do not contemplate the possibility of loss. 

If a person thinks that stocks are going down, the proc- 
ess is a little bit more complicated, for here he must sell 
stock which he does not possess and buy it back later at 
the lower price. As far as the customer is concerned, the 



34 Introduction to Econornic Problems 

process is just the same as the other. He puts up the 
margin with the broker. The broker sells the stock and 
then borrows stock in order to make the delivery. That 
is, he finds some other broker who is willing to lend him 
the stock, sometimes for a certain premium, and with this 
stock he makes the delivery. If everything goes right or, 
perhaps we may say, goes wrong, and the price of stock 
goes lower, the customer orders the broker to buy the 
stock. With this stock the broker repays the man from 
whom he had borrowed the stock. Here again the cus- 
tomer makes the difference between the two prices less the 
commission. 

The Stock Exchange Clearing Corporation. — In the stock 
exchange clearing corporation we have an extension of the 
idea of the clearing-house, which was explained in Turner's 
Introduction, the chapter on Banking. During the day 
the broker may buy and sell a certain stock many times. 
The principle of the stock clearing is that he shall deliver 
to the stock exchange clearing corporation a certain num- 
ber of shares of stock if he has sold more than he bought 
or receive from the clearing corporation stock if he has 
bought more than he has sold. The clearing corporation 
also takes care of the payments for the stock. Thus, the 
clearing is not quite so simple as the bank clearing which 
involves only the checks since this clearing involves not 
only cash and checks but also stocks. The stock exchange 
clearing corporation also handles the collateral back of 
loans of stock-brokers. Thus, if the loan is called and a 
new loan is arranged for, the clearing corporation sees that 
the new lender gets the collateral when it has been released 
by the first lender. 

The stock exchange exists primarily for the purpose of 



Marketing 35 

facilitating the sales of stocks and bonds. Because the 
stocks are uniform, that is, for example, one share of United 
States Steel common is just the same as another share, 
any one may deal on the exchange. This has led to great 
speculation on the exchange. We recognize two general 
types, namely, the speculation of outsiders who are rather 
contemptuously referred to in Wall Street as "lambs " and 
the speculation of experienced speculators. The "lambs" 
utilize the stock exchange as a gambling device. They have 
no information on which to base their purchases. They 
follow wild tips, and the result would not be different if they 
were betting on where the ball would stop in a roulette- 
wheel. The function of the other speculators, those who 
are speculating with some information, is to help in the ap- 
portioning of capital among the industries which desire it. 
Various companies put forth various types of securities 
aimed to raise capital to be utilized in their business. When 
an industry is new and the outcome uncertain, conservative 
investors do not ordinarily care to invest their funds in the 
securities of that industry. But if speculators think there 
is a chance that the industry will prove profitable, they 
may be willing to buy the stock and hold it for the inevi- 
table rise which will come if the industry proves profitable. 
Thus, in the early days the telephone company's securities 
were highly speculative. The telephone company had not 
yet proved its worth. For a long time the railroad securi- 
ties were classed as speculative. Later the common stocks, 
particularly of industrial corporations, belonged to the 
speculative class. 

The stock exchange gives a continuous market for the 
stocks. During the hours when the exchange is open, one 
can always sell or buy. In times of depression, many com- 



36 



Introduction to Economic Problems 



NEW YORK STOCM 



Day's Sales. 
595,942 



Thursday, 
563,650 



Wednesda}^ 
572,701 



A Year Ago. 
603,504 



FRIDAl 



Two Years Ago. 
918,706 



1921. 



High. Low 



48 
40 
391-^ 
IH 

1 ?4 

55 H 
93 J^ 
39 M 
65 J^ 
54 

65 J^ 
32?^ 
88 
133 
114 
29 
8J4 
13H 
59 J^ 
535^ 
UH 
62 H 
93,'^ 
10 
44? 
83 
721 
31 5i 
96 
107} 
88 
108 »-^ 
129 J 
1273 
94 
821; 
10 
43^ 

3 
35 i^ 
87 M 
813^ 



26 1^ 
30 
17 
Vs 

1 
34 
83 

28M 
26 M 
461.^ 
291^ 
23H 
76 M 
115 
108 

8x8 

414 

8 
42 
21 M 

7J- 

3> 
29 ■> 
63 M 
03 
18 

r)8 

85 
37 
95 

110 

80 
57 

6? 
31? 

1 
24 
763^ 
75 i^ 



Sales. 



100 
100 

1,700 
100 

1,400 

1,400 
300 
700 
700 
200 
100 

1,800 
100 
600 
200 
200 
200 
100 
100 

7,000 
400 
200 

7,800 
900 

1,000 
400 
200 
800 

2,800 
500 

9,400 

3,200 

1,100 
100 
30 

5,700 
100 

1,800 
200 
100 

1,800 
200 



Stock and 
Dividend Rates. 



Adams Express 

Air Reduction (4) 

Ajax Rubber 

Alaska Gold Mines ... 

.Alaska Juneau 

Allied Ch. & Dye (4).. 
Allied C. & D. pf. (7). 

AUis-Chalm. (4) 

Am. Ag. Chemical. . . . 
Am. Bank Note (4). . . 

Am. Bosch Mag 

Am. Can 

Am. Can pf. (7) 

Am. Car & Fdy. (12). . 
Am. Car & F. pf. (7).. 

Am. Chicle 

Am. Drug Snyd 

Am. Hide & Leather. . 

Am. Ice (5) 

Am. International. . . . 
Am. La F. F. En. (1). 

Am. Linseed 

Am. Locomotive (0). . 
Am. Safety Razor. . . . 

Am. Smelt. & Ref 

Am. Sm. & R. pf. (7). 
Am. Sm. Sec. pf. A (6) 

Am. Steel F. (3) 

Xn\. Sugar Ref 

Am. Sugar R. pf. (7). . 
.Am. Sum. Tob. (8). . . 
Am. Tel. & Tel. (9)... 

Am. Tobacco (12) 

Am. Tob., CI. B (12).. 
.\ni. Tobacco pf. (6) . . 

Am. Woolen (7) 

Am. Zinc, L. & S 

Anaconda Copper .... 
Assets Realization .... 
Assoc. Dry Goods (4). 
Atch., T. & S. F. (0).. 
Do pf . (5) 



First. 



45 
33 

243^ 

y2 
1 

44 Jg 

88 3i 
34 
35 
50 ?i 
34 

21 M 
79 

128 
108H 

9 

4^ 
lOK 
56 
33 M 

9 
23 
90 H 

4 
36 H 
705-8 
66 M 
25 
62 J^ 

89 M 
43 

107 ^ 
124 J-i 
124 

90 

75 

37M 
1% 
31 
86 
80}^ 



High, 



1 
45 
89'^ 
34 

35 J^ 
51 
34 

28 M 
79 

128 
108}^ 

9 

4 H 
lOJ^ 
56 
333^ 

9 
23 
91 

4 

36 Ja 

72 

6634 

25 

62 J^ 

893^ 

433- 
1073; 
120 3- 
124 J- 

90 

75% 
8 

38 
IM 

31 

86 J 

803!j 



Low. 



45 
33 
23 H 

H 
1 

44 J^ 
893-^ 
34 
35 

50?^ 
34 

273i 
79 

12T% 
108 

9 

4% 
lOJ^ 
50 
32H 

9 
23 
89 

33^ 
36?^ 
70^8 
06 
25 
61 H 
89 
40 H 

124 J^ 
124 J^ 

90 

74 
8 

373^ 

IM 
31 

85% 
803 



Last. 



45 
33 
24 

1 

44% 

8834 

34 

35% 

51 

34 

28 

79 

128 

108 

9 

4M 

10% 

56 

33 
9 

23 

903^ 
3% 

36% 

72 

66 

25 

62% 

89 

413-^ 
10734 
1253^ 
124% 

90 

7534 
8% 

38 
VA 

31 

86% 

80 



Net 
Chge. 



-2 



- % 
+ H 
+ 1% 

+'l'% 
+ % 

+ y2 
+ % 
-1 

+1% 

- % 
+ '% 

+ M 
+ 3^ 

+ 'h 

+ % 

+'"% 
+ 13^ 
-2 



-134 
+ % 
+ l?i 
+ 1% 
+ 1% 
+ % 
+ % 
+ 1 

+ % 

+ H 
+ H 



Closing. 



Bid. Ask. 



45 
36 
23 H 

1 

443^ 
89 >4 
33 ?4 
35 
50 

3334 
27 M 
78 ?4 

127 

107% 
9 
43^ 

\0H 

66% 
33% 

22^ 
90% 

4 
36% 
71% 
06 
25 
62 
8834 
41 3-^ 

107% 

125 

123 
89 
75 
8 
37% 
1% 
31% 
85 3 
801 



46% 
38% 
2434 

1% 
44% 
89% 
3434 
353^ 
51 

35% 
28 
80 

128% 
108 

9% 

4?4 
11 
57 
33% 

934 
23^ 
91 

4% 
36% 
72% 
67 
2534 
62% 
893^ 
41% 
107% 
126 
124% 
90% 
75% 

8% 
38% 

1% 
32 
863^ 

8138 



Marketing 



37 



[CHANGE TRANSACTIONS 



PT. 23, 1921. 

Year to Date. 
123,056,513 



1920. 
160,426,771H 



-Same Period- 

1919. 

218,185,540 



1918. 
95,439,313 



1921, 



High. Low 



29 M 

56 1^ 

1053^ 

21J''2 

12^ 
118 

18 

58 H 
7 

21?^ 

15H 

9314 
lOlJ^ 
167). 

24 

15^^ 

2>W2 

14 

73 M 
3 

23 M 
435^ 
25 

35^ 
79M 
65 
81 
108 

nV2 

74 H 
61J^ 
39 
23^ 
21?^ 
13M 

104 J^ 
40^ 
35 M 



97 J^ 
10 

7 5i 
97 
10 
35 M 

3 
12»^ 

8 
651- 
95 
84 J. 
15 M 
10 
22 

9 
63 

2M 
16 

33 >$ 
145^ 
15 
46 
26 
673/4 
100 

3H 

9 
46 
641^^ 
39 
20^ 
13J^ 
16 



32 M 
31J^ 



Sales. 



Stock and 
Dividend Rates. 



100 Lee Rubber & T. (2). . 
4,700 Lehigh Valley (3}4)... 

100 Lig. & M. pf. (7) 

500 Loew's, Inc 

200 Loft, Inc. (1) 

300 Louis. & Nash. (7) 

200 Mallinson & Co 

200 Manhat. Elev. (7) 

200 Market St. Ry 

200 Mailand Oil & Ref.... 

100 Max. Motors CI. B.. . . 

700 May Dept. S. (8) 

100 May. D. S. pf. (7).... 
40,700 Mex. Petrol. (12) 

500 Miami Copper (2) 

1,800 Mid. S, Oil (1.20) 

900 Midvale Steel 

1,000 M. & St. L. new 

500 M., St. P. & S. S. M. (7) 

400 Mo., Kan. & Texas. . . 

600 M., K. & T. pf 

900 Missouri Pacific 

1,000 Missouri Pacific pf. . . . 

200 Montgomery Ward . . . 

100 Nat. Cloak & Suit 

100 Nat. C. & S. pf. (7)... 

200 Nat. En. & St. (6).... 

100 Nat. Lead (6) 

100 Nat. Lead pf. (7) 

500 N. Rys. of M. 2d pf... 

100 Nevada Con. Copper.. 

100 N. O., T. & M. (6). . . 
3,600 N. Y. Central (5) 

100 N. Y., C. & St. L. (5). 

100 N. Y. Dock(2H) 

3,300 N. Y., N. H. & H 

1,800 N. Y., O. & W 

200 Norfolk Southern 

1,200 Norfolk &W. (7). 

1,700 North Am. ctfs. (3). . . 
2,000 Nor. Am. ctfs. pf. (3) . 



First. 



261--^ 

53^ 

101 M 

13J^ 

QH 

109% 

18 

403^ 
4 
19 
8% 
80^-2 
101 
103 n 
21 
12 

25 M 
9Vs 
70% 
1% 
3 
20 
40 
18)-^ 
163^ 

37 

75)^ 
102 
4% 
11 
53 
73 

54 J^ 
30 
15M 
21 

39 M 
34% 



High. 



26,% 
54% 

101% 

14% 

QH 

110 
18 

40% 
4 
19 
8% 
82 

101 

104% 
21% 
12 
26 
10 
71 
1% 
3 
20% 
40% 
18% 
16% 
46% 
37% 
75% 

102 
4% 
11 
53 

73% 
54% 
30 
15% 
21% 
8% 
973- 
39% 
35 Ji 



Low. 



26% 

53% 

101% 

13% 

9% 
109% 
18 
403-^ 

4 
18 

8% 
8034 
101 
102 
21 

11% 
25 H 

9% 
70% 

1% 

2% 
20 
39% 
18% 
16% 
46% 
37 

75% 
102 

4% 
11 
53 
73 

54% 
30 
14% 
21 

8% 
96% 
393 
34% 



Last. 



26% 

53% 

101% 

14% 

9% 

110 

18 

403.^ 
4 
18 
8% 
81% 
101 
103 % 
21% 
12 

25% 
9% 
71 
1% 

20% 
40% 
18% 
16% 
46% 
37% 
75% 
102 

4% 
11 
53 

73% 
64% 
30 
143, 
21% 

83^ 
97 
393-2 
35 



Net 
Chge. 



+ % 
+ 1 
- % 
+ % 
+ % 
+ 1% 
+ 1 
+ 1 
+ % 

-' % 
+ 1% 
+ 3% 



!<; 



+ % 

+ % 

+ % 

— 1% 



+ % 
-1% 

+'1% 
+ % 
-1 



+ % 

- H 
+ 1 

- % 
+ % 
+ H 
+2 
+ 34 
+ M 



Closing. 



Bid. Ask. 



26 

53 H 
100 
14 

9% 
1103€ 
18% 
40 

3% 
17 

8% 
80 
100 
103% 
21 
11% 
25% 

9% 
70% 

13-^ 

2% 
20% 
40 
18% 
16% 
46% 
37 
74% 
101 

4% 
10% 
61 

73% 
54^ 
30 
14J- 
21 

8% 
96% 
39% 
35% 



27 
54% 
101% 
14% 

9% 
110% 
18% 
41 

4% 
18% 

9 
82 

103% 
21% 
12 
26 
10% 
71% 

1% 

3 
203^ 
40 3i 
18% 
20 
50 

37% 
76% 
105 

5 
11 

52% 
73% 
57 

30% 
15% 
21% 

9 
97% 
39% 
35% 



38 Introduction to Economic Problems 

modi ties are unsalable. Literally, the owners cannot sell 
them at any price. They lack an organized market with 
speculative buyers. In times of depression, stocks listed on 
the stock exchange can be sold. The speculators are will- 
ing to take them at a price which promises to give them a 
profit later on. This continuous market is of the utmost 
importance in banking. Loans can be made with listed 
stocks as collateral security, because the bankers know that 
by requiring a margin of about 20 per cent they can always 
be sure of getting their money back from the sale of the 
collateral if the borrower does not repay the loan. 

The financial pages of the newspapers devote considera- 
ble space to the transactions of the stock exchange. The 
record of the sales of stock varies a little in form in the 
different papers. The table on pages 36 and 37 is from 
the New York Thnes. It represents about one-fifth of 
the whole report. 

The headings are probably self-explanatory except "Net 
Change." It means the change from the close of the pre- 
vious day. It will be noted that the quotations are all on 
the basis of 100 share lots. 

The bond sales, except the government war loans, are 
reported in greater detail, each separate transaction being 
recorded. The unit here is $1,000 par value of the bonds. 
The yield on the Liberty bonds is figured on the last 
sale. 

Another thing of great interest is the record of rates for 
loans of various durations and variously secured both in 
New York and London. The amount of exchanges at the 
clearing-house means the total checks brought by the vari- 
ous banks to the clearing-house to be presented to the 
banks upon which they are drawn, as explained in Turner's 



BONDS ON STOCK EXCHANGE 


FRIDAY, SEPT. 23, 1921. 


1921. 1920. 1919. 


Day's sales $14,654,400 $16,033,850 $10,701,000 


Year to date 2.225. UQ-.m^i 2.656.319.6.50 2.381.080.000 




' ' 


J 7 7 7 7 7 7 1 


UNITED STATES GOVERNMENT WAR LOANS. 


Net — Closing — 


Sales. Issue. Open. High, Low. Last. Ch'ge. Bid. Asked. Yield. 


555 —Liberty 3 J^s, 1932-'47 88.80 88.98 88.32 88.38 -.40 88.32 88.38 4.17 


1 —Liberty 3J^s, reg 88.60 88.60 88.60 88.60 


. . —Liberty 1st cv. 4s, 1922-'47 89.50 89.70 4.71 


. . —Liberty 2d 4s, 1927-'42 89.48 89.64 4.79 


2 —Liberty 2d 4s, reg 89.30 89.30 89.30 89.30 


83 —Liberty 1st cv. 4 Jis, 1932-'47.. 89.50 89.74 89.50 89.62 +.12 89.62 89.70 4.96 


603 —Liberty 2d cv. 4Ms, 1927-'42.. 89.58 89.68 89.56 89.64 +.16 89.64 89.68 5.05 


6 —Liberty 2d cv. 4Ms, reg 89.44 89.44 89.42 89.42 +.10 


913K— Liberty 3d cv. 434s, 1928 93.36 93.64 93.36 93.64 +.30 93.60 93.64 5.31 


54 —Liberty 3d 41^8, 1928, reg 93.30 93.44 93.30 93.40 +.14 


1,382 —Liberty 4th 414s, 1933-'38 89.70 89.88 89.70 89.88 +.22 89.86 89.90 5.14 


6 —Liberty 4th 4Ms, reg 89.62 89.66 89.60 89.66 +.14 


2,037 —Victory 3 Ms, 1922-'23 99.18 99.30 99.18 99.30 +.08 99.30 99.32 4.17 


2,806 —Victory 4 Ms, 1922-'23 99.18 99.30 99.18 99.30 +.06 99.30 99.32 5.18 


94 —Victory 4 Ms, reg 99.02 99.10 99.02 99.10 +.04 


Following sales are given in lots of $1,000: 


14.... 104% 


7 94% 


Ist term 58 


ChineseRy5s 


1....57% 


1.... 66% 


2 104% 


10 95 


1....67% 


4.... 463^ 


4 57 


2.... 65% 


12 104% 


5 95% 


3 67 


5.... 473^ 


1....57i€ 


"onv 5s. SerB 


5 104 


20 95% 


St P & K C S 


3s30f..47 


6 57 


2 65% 


. 27 104% 


5 95% 


L Ist 4%B 


C Bergen 8s, 


2 57 


ref 4%s 


ref 4%s 


5 95% 


6 68% 


temp ctfs 


10.. ..56% 


5 58% 


2 83 


5 95% 


1st 4%s 


20 lOOM 


7.... 56% 


4.... 58 M 


1.... 81% 


gen 3%s 


2.. ..68% 


3 .... 100 


2.. ..57 


C M & P Sd 4s 


6 . . . . 82 


1 67% 


S A & A P 4s 


City Berne 8s 


4s 


5 64 


2 82% 


1 67% 


4 64% 


1.. ..1013^ 


11. ...41% 


15.. .. 64% 


Gulf & S I 58 


6 68 


1....64% 


5. ...101?^ 


1 41 


4 64 


1 72 


con 4s, Ser A 


Sea A L ref 4s 


7. ...1013^ 




C & N W tem 


H Val Ist 4%8 


13 72 


1....37M 


3.. ..101 


Adams Exp 4s 


6%s 


1 . . . . 74% 


deb 4s, 1934 


con 6s 


City Bordx 6s 


1.. ..62 


13 102 


H & M 1st & 


19 81% 


8. ...47% 


1.... 84 J^ 


AmAgCh7%s 


gen 5s 


ref 5s, Ser A 


ref & imp 


1....47% 


City Christ 8s, 


2.. ..97 


5 94% 


5.... 67% 


4%8, Ser A 


2.... 47% 


K,L&Co cfs 


1....96% 


5 94 M 


27 68 


3 80% 


3 47 


4.. ..101 


1....96M 


5 95 


4 . . . . 67 % 


NY, Chi & S L 


1....47% 


CCopen53^s 


Am Sm & Ref 


7s 


adj inc 5s 


1st 4s 


3. ...47% 


3.... 81^ 


1st 5s 


1.. ..103% 


3.... 45% 


2 82 


S Stl H s f 8s 


1.... 813^2 


1....78 


3.... 104 


6 45% 


8 81% 


Ser A 


2 81 M 


5s7f..77% 


5 103% 


15.... 45% 


NY,NH&H non 


4.... 95% 


2.... 81% 


1.. ..78 


Chic Rys 5s 


10 45% 


cv deb 4s, '55 


S C en 7%s 


C Lyons 6s 


1....78% 


2 64 


8.... 45% 


1 38% 


1....92% 


1.... 84% 


2.... 78% 


7 63 M 


26.... 45% 


conv 6s 


3.... 92% 


1 84 


4. ...78 


7 . . . . 64 


2.. .. 45% 


1 52 


4 92% 


1.... 84% 


2.... 78% 


C R I ife P gen 


1.... 45% 


1 52% 


3.... 92% 


1.... 84% 


Am T & Tel 


4s 


26.... 45% 


NY Rys adj 5s 


7. ...92% 


CityMarsls 68 


col 4s 


10.. .. 74% 


1.... 46 


6 8% 


4.... 92% 


1.... 84% 


1....83% 


ref 4s 


111 C 4s, 1952 


11 8% 


21 92% 


1.... 843-i 


2.... 84% 


15.... 70% 


3.... 74% 


ref 4s 


5.... 92% 


City Paris 6s 


2....83M 


27 ... . 70 M 


4s, 1953 


2 22% 


24 92% 


8.... 99i| 


col tr 58 


5.. .. 70% 


10 73% 


NY Tel 


S B T & T 1st 


CityZurich 8s 


4.... 88% 


2.... 70% 


ref 43 


8 f deb 6s 


5s 


11. ...101% 


1....88% 


6.. .. 70% 


5 78 


2 96% 


10.... 85% 


6.. ..101 


2.... 88% 


8.... 70% 


1.... 78% 


2 96% 


1 86 


Dan Mun s f 


1....88% 


1.... 70% 


5%s 


4%s 




8s, B 


1 88M 


5.. .. 70% 


3.... 93 


1 85% 


So Pac col 4s 


.5.... 103 










2.... 73% 



39 



40 Introduction to Economic Problems 

Introduction, pages 300-301. The amount is given to be 
used as an indication of the volume of business. Any in- 
crease in business will result in more checks being drawn, 
and so greater clearings. 

MONEY 

Friday, Sept. 2,3, 1921. 
Call loans on the Stock E.xchange ruled unchanged 
at 5 per cent. Thursday's prevailing rate. Outside 
the Exchange there were a few loans arranged at 4 per 
cent. Time money market remains quiet, borrowers 
bidding 534 per cent, for 60-day funds, with 5>-2 being 
offered, with a differential of yi of i per cent, applying 
to maturities running over the year-end. Demand is 
light, with renewals making up the bulk of business. 
Acceptances were firm but unchanged, likewise com- 
mercial paper, where brokers report an increasing vol- 
ume of paper at lower discount now prevailing. 

CALL LOANS Thursday's 

Renewal. High, Low. Last. Last, 

5 5 5 5 5 

TIME LOANS 
Mixed collateral, 60 days 5K @5>^ 

3, 4, 5 and 6 months 5>2 @5K 

All industrial collateral, 60 days 5/i@5l4 

3, 4, 5 and 6 months 5>^@5^ 

COMMERCIAL PAPERS 

Best names, 4 to 6 months 5H® 

Other names, 4 to 6 months 6 @6^ 

DISCOUNT RATES FEDERAL RESERVE BANK 
Commercial paper, 15 days, 5; 16 to 90 days. . . .5 
Liberty bonds. Victory notes and Treasury cer- 
tificates of indebtedness, 15 days, 5; 16 to 90 

days 5 

OPEN MARKET RATES 

Call loans against acceptances ^}4 

Prime bankers' acceptances eligible for purchase or 
rediscount by Federal Reserve Banks. Rates quoted 
are for discount at purchase. 



Marketing 41 

Bid. Asked. 

30 days 4>^ 4^ 

60 days /\J4, 4^ 

90 days 4^-^ 4^ 

4 months 5 4^ 

6 months 5H 5^ 

Non-member and private bankers, 60-90 days 5^i 5^ 

LONDON MARKET 

Money on the London market was down ^ at 3 
per cent.; short bills unchanged at 4 per cent.; three 
months unchanged at 4}i@ 4^" per cent. 

Gold bullion on the London market down 2d, at 
iios gd. Taking the British Mint's standard of 85s 
per fine ounce as par, the market quotations would 
represent a price of 130 1-3 for gold at London. On 
the same basis the highest London price for gold this 
year was 136^, on Jan. 3; the highest of the period 
149^, on Feb. 6, 1920. 

CLEARING HOUSE EXCHANGES 

Exchange of checks at the New York Clearing 
House, $617,600,000; balance $56,200,000; Federal 
Reserve Bank's credit balance, $50,400,000; clearings 
this day a year ago, $683,553,641. 

10. The Retail Dealers in Groceries. — ^We may take the 
grocery trade as typical of retail trade. First, we will see 
the different types of stores from which the consumer may 
get the groceries. 

The Grocery-Store. — ^The typical old-fashioned grocery- 
store was run by an individual with his own capital with 
no connection with other establishments. The retailer 
bought his groceries from wholesalers and jobbers and com- 
mission men, and so he forms the last step in the process of 
getting the goods to the consumer. 

The Chain Store. — ^This is a development of large-scale 
methods applied to retailing; that is, one organization con- 
ducts numerous stores in some particular city or, in the 



42 Introduction to Economic Problems 

case of some of the larger chain stores, in many of the cities 
in the whole country. The advantage which comes from 
this system arises in connection with the possibility of buy- 
ing on favorable terms (because of the great quantities 
purchased) and of standardizing methods of store arrange- 
ment and store policy in such a way that the best methods 
may be used by all of the different stores. Frequently, the 
chain store buys direct from the producer and so eliminates 
one step in the process of distribution. Sometimes also the 
chain stores carry on manufacturing or at least the putting 
in packages of the products. 

Mail-Order Houses. — In addition to the other products, 
mail-order houses also deal in groceries, and so from these 
houses customers may provide themselves with certain of 
the groceries which do not suffer deterioration. Here again 
the wholesaler or jobber is frequently eliminated from the 
process, as the mail-order concern may buy direct from 
the producer. 

The Department Store. — In some cases department stores 
sell groceries. Here an advantage arises from the fact that 
the large number of different departments are under uni- 
fied control. The department store often carries on a large 
business and has the advantage of being able to buy in 
large quantities. 

Co-operative Stores. — A considerable number of the co- 
operative stores which have been established in this country 
deal in groceries. Here the advantage is supposed to be 
gained in cutting down the expense of conducting the busi- 
ness. There is no particular advantage in this country in 
the purchase of the goods. In England, where the co- 
operative system has achieved a greater development, the 
co-operative wholesale societies are conducted for the bene- 
fit of the co-operative stores. 



Marketing 43 

Public Markets. — For the sale of vegetables and fruits, 
very frequently a system of public markets is in existence. 
In the smaller towns and cities the producers deal directly 
with the consumers. In the larger cities, the sale in the 
public market is frequently conducted not by the producer 
himself but by the middleman who has bought from pro- 
ducers. 

The Company Store. — In many coal-mining towns, the 
coal company keeps a store and, of course, groceries bulk 
large in the sales. The credit risk is frequently minimized 
by deducting the amount due at the store from the wages 
coming to the miner. Frequently the mines are at a dis- 
tance from trading centres, and so the company stores are 
a real convenience. However, sometimes they are used as 
a means of reducing the wages of the miners. 

The Retail-Wholesale Store. — This hybrid is usually a 
transition type. An ambitious retailer starts wholesaling 
on a small scale ; eventually he may give up retailing and 
devote all of his time to wholesaling, or he may develop a 
chain of stores. Retailers in the same city do not care to 
patronize a wholesaler who competes with them. 

II. Other Types of Retailers. — Besides the types of re- 
tailers who handle groceries, we find other varieties. A 
local store may be the agent of a manufacturer. This is 
quite common in clothes and shoes. In the larger cities 
there has been a growth of specialty stores. These stores 
handle a restricted line of goods, especially women's clothes. 
Some manufacturers wish to control their product until it 
gets into the hands of consumers. In this case they open 
retail branches. In the selling of milk, we may say that 
there are wagon retailers, for the bulk of the sales are really 
made from the wagon. Finally, some retailers deal in 
bulk in such commodities as coal. 



44 



Introduction to Economic Problems 



12. Types of Wholesalers. — llic General Wholesale Mar- 
kets. Ill dry -goods, for example, we have a market price 
which holds in New York and vicinity. This case differs 
from the preceding cases, because there is no one place 
wliere the traders gather, and there are no such clearly 
established grades. Yet wo get a price set for the various 
articles, uniform enough to justify calling it a market price. 
'V\\c essential feature is that we have competitive groups 
of buyers and competitive groups of sellers who keep in 
close touch with what is going on in the market. 

Quotations such as the following may be found in the 
business papers, as the Journal of Commerce, and in the 
trade papers. In less detail, some of the items appear on 
the financial pages of t'he newspapers: 



CANNED FRUITS 

While no less than three steamers are due in New 
York any time with goodly quantities of canned 
riNK.VrrLE, the spot stocks are very short. The 
demand all arounil is reported good with short deliver- 
ies of certain classes assured, buyers arc taking good 
quantities of others. There is some activitv in 
.APPLKS and good sales of CR.VNBERRY JELLY 
anil S.\UCM<] are reported. The announiement of loo 
per tent delivery on TE.VrHES and I'E.ARS has not 
weakened the market heeause of the short surplus. 



No. los, std 8 ooa . . 

Choiee 9 ooa . . 

Mil., igu) pk, 

No. 3 pies ;u 30 

No. 10, unpoolod 

vollows 5 7i*a5 80 

APRICOTS U'al.) — 

Std., j'js 2 15a. . 

Clioiee 2 40a . . 

I'\»nev a J 75 



pi:.\e'iii:s~ 






W'llow, free- 


- 




Std., 2%% 


.2 


15a 


Choice, a^-js 


.2 


55^1 


Fancy, a^s 


.2 


75'» 


los, std 


_ 2 


75a 


Yellow, elings- 


- 




Std., 2>1,S 


.2 


27a 


Choiee, 2.Hs 


.2 


8(XJ 


Fancy, 2}is 


■ ,A 


tx)a 



No. 10s 7 5oa8 50 



Marketing 



45 



50 



PEARS— 

Calif. Bartlcts — 

Fancy, 2j^s 3 26a3 

Choice 3 00a . . 

Standard 3 00a . . 

I OS, clioice II 25a. . 

los, std 9 ooag 

Kiefer — 

Fancy i 90a. . 

Ex. standard i 60a . , 

No. 2, fancy i 40a . . 

No. 2, std I 2isa. . 

pineapples- 
No. I grtd ai 

No. 2 grtd ai 

2>^s a2 

No. 10 pie 5 ooas 

Hawaiian — Sliced — 

Ex., 2s 2 40a. 

Ex., 2>2S 2 85a. , 

No. los 10 ooa. . 

Grtd, 2s, std i 8oai 

Grtd, 2s, ex i goal 

Std., 2>^s 2 35a2 

CRUSHED— 

1 flats I 50a. . 

2 tails 2 35a. . 

2)4 tails 3 ooa. . 

los, std 6 75a. . 

CHERRIES— 
Cal., 2>2S, std 2 85a2 95 



Choice, 2 K^s 3 25a3 50 

Fancy, 2^s a3 60 

Fancy, 3s a3 75 

No. 10 sour, pit- 
ted ai6 00 

APPLES— 

Me., los 5 85a6 00 

Pa., los a. . 

N. Y., los 5 25a5 55 

N. Y., 3s 2 ooa. . 

RASPBERRIES— 

Std., 2s 2 6oa. . 

Xstd., 2s 5 ooa. . 

No. ID ex I 2ia. . 

No. ID watr.. . . II ^oaii 75 

rhubarb- 
No. 10 4 25a4 75 

STRAWBERRIES— 
Spe ex No 2 3 ooa3 25 

do h'y syr 2 75a3 00 

los, std., in water 9 ooa. . 

BLUEBERRIES— 

Maine, 2s 2 25a2 50 

Maine, los 12 50ai3 00 

blackberries- 
Ex. std., 2S 2 50a. . 

Fancy, 2s 2 75a . . 

GOOSEBERRIES— 
2S, Std., in water. . i 5031 75 
los 8 50a. . 



GENERAL CLOTH TRADING AND PRICES 
VERY STEADY 



Trading in the cloth markets was quite general and 
very steady with no one division leading in special in- 
terest. Print cloths were sold on a basis of j }4c for 
Southern 60x48s and yj^c Eastern; 38>^-inch 64-X60S, 
Qc; 68x72s, loyic; 72x76s, II Kc; 80x80s, 14c; 27-inch 
q yards, S'^A'^i second hands and 27-inch 7.60 yards, 

Sheetings sold in moderate quantities on a basis of 
IOC for 4-yard 37-inch 48-X48S; 1 1 }ic for 4-yard s6x6os, 



I nfnxhicliDii to l']<'i)iu)iuic rn)hl(ius 

:iii<l i)t 11(1 Idi I '/OS. \^-\y, iii.iiiul;u ( iiK'is .iic slill open 
It) liilvf in smiill lots, cspci ijilly w licii roiu <'ssii)iis hum 
inline (|U(>(ali()iis :ir(> math*. 

riic improv'fd tlcmaml toi line iimiln'tl \aiii floods 
\v;r. idiil iiuu'tl. Some «»l (lie roiivci (( is an- pit kiiif^ 
up aii\ (Ifsiral)l(' h)( ol nu'dinm or low j^ratlr goods on 
I lie I lit on Ihal lluv art' i«Mlaiii (t> he wauled when 
I 111- lull tllti I t)l \iiy IukIi prut'S oh I he liiuT (jualitifs 
iK-giiis lt> In- Iclt. II is alst) slaird llial llu' dfiuand 
Itii' liiiislird floods is hroadeuiiif^ and ttJiivcrlcrs aiv 
proviiliiig I lifiiiselvcs willi tlollis llirv may ln" aMf Iti 
sell al an allrai li\r |>rit"r lor st)nic time to conir. 

( tuil iiuifd iiiipit>\ ciiunl is icpttrlcd in liir lalnii" 
ilciii.iinl, iiolliin^.', ill I lie \\a\' t)l laigc l)usint'ss liciiig 
doiit-, hill a d(-liiiili' tlciiiand litini ttint I'l lis thai liaxc 
lici'ii oiil t)i I he inaiLi'ls Itti iiionllis. 











OK 


U 1 s 








Wit nil 


1. vvk 


;li( 




I'litV. 


Wi.llh 


w 


^^l't. ' 


I'riiT. 


.\7 


.\ 


50 




1 1 • J 


.V 


.\ 


00 


1 J 


.<7 


.\ 


(Ml 




I .' ' J 


.\«' 


-• 


«.s 


ij^a 


x; 


.\ 


').S 




10 1 , 


1 1 mils 


,\ 


-•.s 


1 1 >a 


\\i 


tUli 




( 't)lllll 


Wi.l 


III 


Colli 


i( 


.111.1 




and 


1 


.oil 


1 


ami 


1 


weight. 




prii'O. 


Wfiijl 


ii. 


pritc 




a.s 


»".35 




56-44 


4H' 


38 W 


6.35 


60-48 


Ih 


37 


«)..St> 




II 11 


.s 


.v'^ ' J 


.s-.^.s 


<».| (>o 





37 


«).oo 




;,(. ;,.• 


,s ' - 


.^o 


•I-7.S 


OS 7,' 


loV^ 


a; 


7.(>o 




(.| (.0 


"' 1 


.V) 


1 --.s 


7-70 


^^yi 


.ak^,. 


H.JO 




•11 1" 


() 


.\') 


.piH) 


So So 


>4 


.^'> 


(>.(>o 




M' II 


SUM 


■II 
I riNt.s 


(>,.|o 


.|S .|S 


7>'^ 


\u 


,» oo 




.|S .|S 


1 ,' 


.<«' 


<• 1 5 


41 4«> 


()?S 


\,u 


.} t>o 




.|S .s .• 


lt>' , 


y; 


4.00 


4S4S 


10^4 


.i'' 


•1 •/«' 




.(S ;,.. 





.|0 


J.H5 


4S-48 


IJA4 


M' 


s.oo 




.,S .(S 


S ' J 


•1" 


,V(>o 


5(> <>o 


Xi^i 


.U> 


.S .s" 




.|S .n» 


7S 


1*' 


1 -VS 


■II 1" 


';»■» 


,U 


.S.oo 




.|S .,s 


SS 


















SMIiKNS 








VH 


4.00 




(>1 St> 


1 1 


y 


.|.oo 


(..| II.' 


'J 


37 >» 


S-'> 




"1 !- 


10 


.\') 


.|,.-o 


(>! io| 


i.< 


yi 


.v.v> 




;: i.-t) 


l(> 











Marh'iimj 



47 



TVVII.I-S 

.V) .|..S<» f>H-7^> •»/'■♦ .\') 5-H) 64-64 9>^ 

,V) 4.<«> <)H-76 li),i ,v) ,^i<» «K>-64 17 

n.AIN COMIIKl) (l.OlllS 

.V> II..-^5 KH-Ho 12 40 .S.50 .SH .So i<> 

40 <).()() 76-72 14^ jo 7<'<» <)'> loo i^i'j 

I'AjAMA ( Ilia KS 
36>^ 4.70 72-H(> II>a 36;,i 5.75 6,|-(.() 10 



KINi:S'l' (IRADKS OI- KRKSII Itiriri'.K SOLD 
UI'/nilK AND rONK I'1KMI:K 

lilirriOK. Ucccipis ycs(,onln,y, 5,v-|S iKukagcs. 
As most of I 111' joblxTS licid olT the I.idcr p.irl of Ijisl 
week, (licy wen; iieediii)^ f.iir supplies of fresli slock 
yes(er(l;i,y, ;i,iul business k<"'""''''".V w;is belter. I)e- 
ni.iiid, liowever, w;is (((iirnied ( losely lo liiu; and fa,ney 
grades of fresh crejiinery ; lliese advanced about lie 
willioul pulbiig up [\\{.: other (jualilies t.o any extent,. 
I'lesli crea,iiu;ry extras sohi at i.r'j a 44c, niori; gener- 
.'dly I lie lalliir ligure where inspect ed goods were de- 
manded, and tin; higher scoring lots brought 'W/j a, 
4SC. Marks just under extras sold belter and brought. 
42>a a 4.<c, but all otluu- grades of fri-sh creaniery, in- 
cluding whole milk and cent r.dized, w(;ie without im- 
provement. The accumulations have been very h<;a.vy 
of lale, ;in<i buy<n's showed very little interest. I'llTort 
was ina,d<; to draw orders from the I'^ast, but that 
source of outlet seemed to Ix; pretty w("ll filled for the 
moment. A lot of stock was Si'ekiiig outlet from 350 
lo ,<H<'. belief (|ua,liti(;s at .<()c to 41c. Uiisalled cr(;a!ii- 
ery v(My slow, and i)ric(;s favored the buy<'r, with I he 
(exception of fancy stock, whi< h lirnu'd up a. lillhr in 
sympathy with the best salted. Ladles had quiet 
jobbing sah; at unchanged prices. Packing stock in- 
quired for and liriii. 



iJurrioR-- 

( 'reaiiiery- 
IIIkIk r than e.\tra..^,|;ja45 
I'.xli.is |,| a . . 



I'liHts — 
(c)O-(JI sc), 
(HHHc) sc), 

Sccondii 

I.owci' j.;iMs. 



.V),'..a4^ 
■32 1133 



48 



Introduction to Economic Problems 



Unsalted — 
Higher than extra. 46 3.^6^4 

Extras 44i^a45>^ 

Firsts 36>^a43 

Seconds 34 a36 

State Dairy — 

F'inest 42 a43 

Good to pme 37 a4i 

Com. to fair 30 336 

Renovated — 

Extra a. . . . 

Firsts a 



Ladles — Fresh — 

Extras 32 3.32 }4 

Firsts 29>^a30>^ 

Seconds 28 a28^ 

Poorer 26 a27 

Packing Stock — 
Fresh — 

No. I 28 a. . 

No. 2 27 a. . 

Poorer 25 a26>^ 



THE RICE MARKET 

The rice market is firm with trading nominal. For- 
eigns are strong due to the rise of exchange, and do- 
mestics, small in spot stocks, continue at full prices. 



Domestic — 

Screenings 3^a. . 

Second head 3^3.4 

Medium h'd aH^S 

Fancy head G^/iayyi 

Choice head 53/^a6K 

Blue Rose — 

Fancy SH^-SH 

Choice 5 a. . 



Japan- 
Fancy. . . 



• 5 asX 



Choice 4^^a4^ 

Foreign — 

Siam, usual a4^ 

Saigon — 

No. I a4>^ 

No. 2 a. . 

Rice Flour a3^ 



Spot stocks mean amounts actually on hand in this 
market in distinction from supplies situated in other mar- 
kets or in producing centres. 

General Wholesalers. — Some wholesalers, especially of 
groceries and dry-goods, attempt to supply all of the needs 
of stores in those lines. They assemble the goods from 
manufacturers or producers and sell them in the quantities 
desired by the retailers. Often they finance the retailer. 

Specialty Houses. — In recent years there has been a 
growth of houses that specialize in some particular part of 
a general line, as knit goods. This is an example of division 
of labor in the marketing field. Perhaps the movement is 



Marketing 49 

due partly to the fact that it takes less capital to start a 
specialty house than a general wholesale house. 

Catalogue Houses. — Just as we have mail-order houses in 
the retail field, we find them among the wholesalers. They 
aim, in general, to replace the travelling salesmen by the 
catalogues. It will be interesting to see how the contest 
between the written and the spoken word comes out. 

Commission Houses. — The commission house takes charge 
of the sale of goods, and for its services deducts a commis- 
sion. These houses are found in central markets. They 
often handle goods shipped for considerable distances. It 
is this factor of distance, the intermittent and uncertain 
character of the supply, and the fact that the goods are 
perishable, which make it convenient to use the commis- 
sion house. Thus, fruit growers at a distance could not 
afford to go to market with each shipment of fruit. It is 
impossible to foretell the quantity or quality of the crop, 
so contracts for future sale are difficult to make. If the 
supply were steady, permanent arrangements could be 
made. Often the season lasts only for a week or two. If 
the goods were not perishable, other methods might be 
used. 

The demand for such perishable fruits and vegetables is 
rather inelastic. Thus, if shipments happen to be bunched, 
the returns may be disappointing. The long distance be- 
tween the shipper and the commission merchant gives 
chance for disputes as to the condition of the goods on ar- 
rival and as to the adequacy of the price which was re- 
ceived. This condition has often resulted in co-operative 
marketing. 

Co-operative Marketing. — There are many forms of co- 
operative marketing. In one the growers, say of berries. 



50 Introduction to Economic Problems 

in a given region will form an association. This associa- 
tion will represent the growers in their efforts to obtain 
good freight rates. It will also have a representative in 
the big central market for the crop. Sometimes this rep- 
resentative takes charge of the sale of the goods shipped. 
Sometimes the goods are still handled through the commis- 
sion men, but under the watchful eyes of the association's 
representative. 

The farmer's co-operative grain-elevator is another im- 
portant type of co-operative marketing enterprise. The 
marketing of grain involves making provision for storage. 
To remedy abuses which grew up when the only available 
elevators were under semimonopolistic control, the farmers 
decided to run their own elevators and do their own mar- 
keting. 

Perhaps the largest co-operative marketing enterprise is 
the California Fruit Growers' Exchange. The California 
fruit is marketed at great distances from the places where 
it is grown. Most of it must be sent in refrigerator-cars. 
The Fruit Growers' Exchange takes entire charge of the 
crop, grading and packing the fruit and seeing that it is 
properly iced. They have agents in all of the principal 
cities in the East and Middle West who watch the supplies 
of California fruit in their localities. The fruit is started 
from California without any destination being specified. 
When the cars reach some place, such as Kansas City, they 
are consigned to the cities which, according to the reports 
of the agents, offer the most favorable market for the fruit. 

Brokers. — The term broker is applied to men who per- 
form various functions. There is the broker who is a mem- 
ber of some exchange and executes orders to buy or to 
sell for any one who wishes his services. One common use 



Marketing 51 

of the term refers to the man who brings buyer and seller 
together. We may say that the lack of knowledge of the 
two gives the broker a chance to function and, incidentally, 
the chance to make a profit. Often we think of a broker 
as one who buys and sells at the same level of marketing; 
for example, buys from one wholesaler and sells to another 
wholesaler. In this way he serves to correct maladjust- 
ments of supply. 

Auctions. — ^The auction is used as a wholesaling device 
as well as to sell goods to consumers. The use is common- 
est in the sale of fruits and carpets. 

Wholesale Branches. — The meat-packers have a special 
marketing problem. They are dealing with a very perish- 
able product. Fresh meat must be sold quickly. A sys- 
tem of branches selling direct to retailers has been devel- 
oped. Thus, on one hand, a continuous supply is furnished 
and, on the other hand, overstocking is avoided. 

13. Wholesale Consumption. — In general, materials to 
be used in production of consumable goods are handled in 
slightly different fashion from goods to be sold to con- 
sumers. Different lines are handled in various ways. 

Direct Sale. — Coal and iron are frequently sold by the 
producer directly to the user. The following market re- 
port indicates the type of factors which enter into the 
price-making: 

POSITION OF PIG IRON CONTINUES TO 
IMPROVE 



ACTIVITY IS NOT MARKED BUT DEMAND STEADILY IN- 
CREASES — LOCAL SALES LAST WEEK 4,000 TONS IN 
SCATTERED LOTS OVER 4TH QUARTER 

Demand for pig iron continues to improve and, 
while there is no marked activity, the market is stead- 



52 Introduction to Economic Problems 

ily growing stronger and the undertone is decidedly 
more healthy. During the past week sales of foundry 
grades in the local district aggregated about 4,000 
tons of various descriptions in lots ranging from carloads 
to 500-ton lots. Most of the business placed was for 
delivery over the balance of the year, which in itself is 
an indication of growing confidence that the low price 
levels have been reached and that the tendency from 
now on is likely to be upward. Inquiries received by 
local selling agents cover requirements of some 3,500 
tons, also in scattered lots, the largest of which is for 
goo tons for prompt shipment. As the season ad- 
vances it is becoming more evident that stocks in con- 
sumers' hands have dwindled considerably and there 
is every indication that demand will show a steady 
improvement from now on. Business for the most part 
has been confined to Pennsylvania, New Jersey and 
New York deliveries. Some little demand has come 
from Boston, but New England requirements as a 
whole have been relatively light. September returns 
are expected to show an increased production over 
August, which in turn had registered an improvement 
over July. One Susquehanna furnace has been added 
to the three now in operation. 

The meltings from all accounts have not increased 
materially, though on the whole there has been no 
falling off. The improvement in demand is attributed 
almost solely to the steady decline in the amount of 
stock carried by the foundries, and as the current ship- 
ments are known to be in excess of the furnace output 
the statistical position of the market is decidedly im- 
proved, with the result that prices are more firmly 
held than ever. Eastern Pennsylvania and Buffalo 
iron is quoted at the basis of $20 to $21 at the furnace. 
This gives the former the advantage in the delivered 
price, but at least some Buffalo iron has found its way 
to the local market. 

PIG IRON, FUEL AND ALLOYS 

No. 2 Pittsburgh $22 96a 23 96 

No. 2 X Philadelphia 21 34a 22 26 

No. 2 Valley, furnace 21 00a 22 00 



Marketing 53 

No. 2 East Pennsylvania 20 00a 21 00 

No. 2 Southern, Birmingham 19 oca 20 00 

No. 2 Virginia, New York 28 i6a 29 10 

No. 2 Chicago 22 oca 

Basic Valley, furnace 19 25a 19 75 

No. 2 Buffalo 20 ooa 21 00 

Bessemer, Pittsburgh 21 96a 22 46 

Malleable, Pittsburgh 22 46a 22 96 

Malleable, Chicago 22 ooa 

Malleable, Valley 20 50a 21 00 

Malleable, Buffalo 22 ooa 

Gray forge, Pittsburgh 21 96a .... 

L. S. Charcoal, Chicago 30 ooa 

Domestic Ferro-manganese — 

Prompt delivery, 78% to 82% 60 ooa 63 00 

Spiegeleisen, 20%, furnace 25 ooa 26 00 

Ferro-silicon, 50%, delivered 60 ooa 65 00 

Bessemer ferro-silicon, 12%, blast furnace. 43 loa .... 

COKE— 

Connellsville, furnace 3 25a 3 50 

Connellsville, foundry 4 25a 4 75 

Wise County, furnace 5 25a 5 75 

Wise County, foundry 6 ooa 7 00 

Pocahontas, furnace 8 ooa 8 50 

Pocahontas, foundry 8 50a 9 50 

New River, furnace 6 50a 7 50 

New River, foundry 8 ooa 8 50 

OLD MATERIALS.— The following prices are current 
in New York: 

Rerolling rails $l I 50a 12 00 

Relaying rails (nominal) ... 37 50a 40 00 

Old car wheels 11 ooa 11 50 

Steel car axles 11 ooa 1 1 50 

Iron car axles 18 ooa 19 00 

Heavy melting scrap 7 ooa 7 50 

No. I yard, wrought 11 50a 12 00 

Iron and steel pipes 8 50a 9 00 

Machine shop turnings 3 50a 4 00 

Cast borings 5 5oa 6 00 

Stove plates 9 50a 10 00 



The need for continuity of supply is one of the factors 
which has led to the integration of industry. 

Things such as engines and cars are usually sold direct 



54 Introduction to Economic Problems 

from maker to user. There are comparatively few works 
which make them and comparatively few users. The bar- 
gaining process is carried on between the sales agent of the 
maker and the purchasing agent of the user. 

Organized Speculation. — The bulk of the grain and cot- 
ton is sold through exchanges. As was explained above, 
this is made possible by grading the commodities. The 
presence of a large body of speculators gives a continuous 
market and steadies the price throughout the year. 

Raw-Material Merchants. — Because raw wool cannot be 
graded so satisfactorily, it is usually handled by dealers and 
sold by sample rather than by grade. 

Auctions. — Besides the use of auctions mentioned above 
to get goods into the hands of retailers, they are used in 
handling raw materials. Thus, much of the tobacco-leaf 
is sold at auction to the manufacturers of tobacco products. 
Raw furs are also sold at auction. 

14. Organizations for Marketing in Foreign Countries. 
— For a long time our exports consisted largely of agricul- 
tural products. We may say that the foreigners took the 
initiative in buying our cotton, our wheat and flour, our 
meat. More recently some of the trusts have developed 
a foreign trade, which has involved more activity on our 
part. Thus, the Standard Oil Company, the International 
Harvester Company, the Singer Sewing Machine Company, 
the United States Steel Company, and others, either di- 
rectly or through subsidiaries, sell goods in many foreign 
countries. They are big enough to undertake alone the 
expense of foreign branches and agents. Smaller manu- 
facturers could not afford to do this. By the Webb Act, 
combinations for marketing abroad are permitted. Thus, 
it is contrary to the anti-trust laws for the manufacturers 



Marketing 55 

to combine to exploit the home market, but it is perfectly- 
legal for them to combine to exploit the foreign market. 

15. Exercises. — i. (a) What caused the separation of 
producer and consumer? 

(b) What are the functions of the merchant? Illustrate 
how these functions arise from the separation of the pro- 
ducer from the consumer. 

2. Why cannot a merchant make the same percentage of 
profit on the turnover of all the articles he sells? 

3. Get a copy of the Bulletin of the United States Bureau 
of Labor Statistics on Wholesale Prices. Make a list of 
the markets for the various articles. List the sources of 
information. 

4. What functions of the middleman were performed even 
in a simple organization of society? Show the logical re- 
lationship among the following: trade, differentiation in 
production, territorial division of labor, transportation, 
middlemen. 

5. How can a New York City store afford to deliver goods 
in Plainfield, New Jersey (about twenty-five miles from 
New York City) ? 

6. (a) Enumerate the activities of middlemen in the dis- 
tribution of butter. Classify these activities as to whether 
they are productive or merely acquisitive. 

(b) Does it justify the continuance of the middleman to 
explain that he performs functions? 

7. Account for the recent tendency of stores to take on 
other lines, e. g., drug-stores. 

8. In how many different kinds of stores is candy sold? 

9. Does it ever pay a store to carry goods, say postage- 
stamps, which it sells at cost? Why? 

10. (a) Is the added expense of package goods justified? 
Defend your answer. 

(b) How do package goods make possible a simplification 
of marketing ? 

11. Why is grading so important in the marketing of 
wheat ? 



56 Introduction to Economic Problems 

12. What would be the effect of a decline in illiteracy on 
the methods of marketing used and on the desires of con- 
sumers ? 

13. Is it good salesmanship to force a sale on a customer? 

14. Does advertising add to the price paid by the con- 
sumer of, c. g., Ivory Soap? Wrigiey's Gum? Ford auto- 
mobiles? Heinz 57 Varieties? 

15. What difficulties would there be in the use of the 
parcel-post as a means of direct dealing with farmers to 
get butter, eggs, potatoes, and apples? 

16. Why is the principal wheat market in Chicago, when 
there are other cities which actually handle more wheat? 

17. W^hy do the prices of the different grains move in 
the same direction? 

18. List the factors which influence the price of wheat 
futures. 

19. Why does not the price of flour follow the price of 
wheat just before a harvest? 

20. Is there an analogy between Blue Sky Laws and 
Pure Food Laws? Why or why not? 

21. Is there anything which corresponds to fashion in 
the demand for securities? 

22. What causes the greater fluctuation in the prices of 
speculative stocks as compared with investment stocks? 

2 7,. Why is the New York Stock Exchange so much bigger 
than any other stock exchange in this country? 

24. Why does the public condemn the bears more than 
the bulls? 

25. Make a list of Ave things ranked according to their 
salability. Which would the bank prefer as collateral for 
a loan ? 

26. Explain the difference in the function of speculation 
in the case of grain and in the case of stocks. 

27. How would 106 street-car fare affect retailing in 
New York City? 

28. (a) What effect does the telephone have on the loca- 
tion of a store? 



Marketing 57 

(b) Do wholesale and retail houses require the same type 
of location ? 

29. What is the difference between the department store 
in the city and the general store in the country town ? 

30. Compare the efficiency of the co-operative retail 
store and the chain "cash-and-carry" store. 

31. Why does not the department store drive out the 
single-line store? 

32. How can the individual retailer survive the competi- 
tion of the chain store? 

33. Discuss the possibility of developing the mail-order 
house for local trade. 

34. What advantage, if any, has the specialty store over 
the department store? 

35. Suppose a new method were devised which would 
permit milk to be kept indefinitely; how would it affect the 
marketing of milk? 

36. What are the advantages and disadvantages of 
auctions ? 

37. Is co-operative marketing advantageous or disad- 
vantageous to the consumer? 

38. What was the marketing problem back of the prac- 
tices in the building-supply combinations exposed by the 
Lockwood Investigation in New York City ? 

39. How does the purchase of a steam-engine differ from 
the purchase of coal ? 

40. How do interlocking directorates connect up with 
marketing problems ? 

41. Why is there considerable room for bargaining in 
sales for wholesale consumption? 



CHAPTER IV 
CYCLES IN TRADE AND INDUSTRY 

I. The Course of Cycles. 2. The Periodicity in Business. 3. Mithc- 
ell's Theory of Business Cycles. 4. Rising Prosperity. 5. The De- 
velopment of Stresses. 6. Crisis and Panic. 7. Depression. 8. Miti- 
gating the Crises. 9. Exercises. 

1. The Course of Cycles. — Our modern complex indus- 
trial system is characterized by a pronounced variation in 
activity. At times we have prosperity, every one is work- 
ing, industries are being expanded and goods are being 
produced in great quantities. Then we have crises. Pros- 
perity is checked, pessimism replaces optimism, the indus- 
trial machine seems to falter and refuses to function. 
Sometimes these crises degenerate into panics. The mon- 
etary system, the banking system, and the credit system all 
fall under suspicion. The confidence which is necessary 
for their working appears to be lost. After the crisis or 
panic comes depression. It is often called "hard times." 
Production is slackened, factories are idle, and men are 
out of work. After a while prosperity develops again 
and the cycle repeats itself. 

2. The Periodicity in Business. — In the United States 
we have had crises of greater or lesser severity in 18 14, 
1818-1819, 1837, 1857, 1866, 1873, 1884, 1893, 1907, 1914, 
and 1920. In England, the crises in the same period came 
in 1810, 1814, 1819, 1825, 1837, 1847, 1^57; 1864-1866, 
1882, 1890, 1893, 1907, 1914, and 1920. We notice that 
there is a rough but not exact correspondence. Sometimes 
we find a crisis in one country without a corresponding one 
in the other country. There are also differences in inten- 

S8 



Cycles in Trade and Industry 



59 



sity in the two countries. Ten years seems to be the 
commonest interval, but it does not occur in a majority of 
the cases. By using refined mathematical methods, Pro- 
fessor H. L. Moore finds a cycle of thirty-three years with 
a minor cycle of about eight years superimposed. 

We may turn next to statistics which show the consider- 
able changes which take place in industry and in various 
markets. 

The monthly letter of the Federal Reserve Bank of New 
York for August, 1921, gives the following table showing 
a calculation in percentage figures of the production in 
this country of eleven important commodities in each 
month of this year up to June. To arrive at a fair estimate 
of normal production a statistical analysis has been made 
of all available figures for previous years, and allowances 
made for normal growth. The percentages are as follows: 



(Normal Production Equals 100) 








Jan. 


Feb. 


Mar. 


Apr. 


May 


June 


Anthracite coal mined . . 
Bituminous coal mined 
Pig-iron production . . . 
Steel-ingot production . 

Tin deliveries 

Cement production .... 
Cotton consumption . . . 

Wool consumption 

Sugar meltings 

Wheat flour milled 

Meat slaughtered 


IOI.3 
73-6 
70.0 

58.3 
30.1 
77.8 
54-8 
55-4 
53-6 
79.6 
88.2 


II0.8 
64.0 

59-1 

48.8 
30.7 
70.3 
66.7 

67.1 

77-9 
80.0 
92.2 


93-4 
57-4 
44-4 
40.0 
32.6 
88.2 
66.1 
87.8 
120.0 
107.9 
91.9 


98.2 
64.0 
33-2 
30.9 
30.8 

87.7 
63.6 
98.4 
93-9 
II3-7 

lOI.I 


88.9 
67.3 
33-7 
31-9 
23.7 
82.8 
67.1 

105.2 
80.3 

104.6 
96.9 


94.1 

65-9 
30.8 
26.5 
30.8 
83.6 

72.5 
106.6 

79.2 
116. 1 
102.0 



The following table, prepared by Bradstreet's, gives in 
percentages the decreases (or increases) of various things 
which indicate activity in business. July, 1 921, is compared 



60 



hitrodiiction to Economic Problems 



with July, 1920, and the seven months, January to July, 
1921, is compared with the same period of the year 1920. 





December from Year Ago 


July 


7 Months 


Price index-number, August i 

Bank clearings, United States 


41.2 

25 I 

22.5 

28.0 

t 150.0 

t37-3 
25.0 

t2.0 

77-7 
29.2 

ti7.6 
71.8 
58.0 
29.7 
38.7 

t32.7 
14 5 
21.4 

8.4 
66.8 

50.5 

t32.4 

71.3 

56.5 

2.7 

t228.7 


*39-2 

23.1 

22.1 

24.4 

t 198.0 

ti95-2 
24.7 
21 .2 
46.9 
20.9 
t39.8 

514 
60.0 
25.2 
370 
t4.5 
ti.o 
24.1 
t2.5 
57.0 
41 .6 
10.7 
51-9 

14 

t48.o 


New York City 

Outside New York 


Failures (number) 

Failures (liabilities) 


Stock sales 

Bond sales 

Incorporations 

New capital issues 

Municipal-bond sales 


Pig-iron production 

Lake Superior iron-ore shipments 

Commerce Sault Ste. Marie Canal 

Mail-order business (two houses) 

Fire losses 

Anthracite-coal shipments 


Bituminous-coal production % 


Anthracite-coal production J 

Merchandise imports .' . . . 


Merchandise exports 

Building (Bradstreet's report) 


Steel-ingot output .... 


U. S. Steel Orders, July 31 


Railroad earnings, gross § 


Railroad earnings, net § 





• Average for eight months, 
t Increase. 



t Week and season ending July 30. 
§ May and five months. 



3. Mitchell's Theory of Business Cycles. — The old ex- 
planations of crises proceeded on the assumption that pros- 
perity was the usual or normal state of affairs and that the 
crisis was due to some extraordinary event such as a crop 
failure, some great disaster such as a lire, flood, war. Each 
crisis thus had a different explanation. The newer expla- 
nation holds that our economic organization is so put to- 



Cycles in Trade and Industry 61 

gether that we must expect rhythm in business; a more or 
less regular succession of prosperity and depression; of 
rising and falling prices. No mathematical exactness is 
expected in the periodicity. A favorable or unfavorable 
event may prolong or shorten the period of prosperity or 
depression. Thus, a good crop may shorten the period of 
depression. 

Many men had framed explanations to account for this 
recurrence. Most of these explanations picked out one 
factor and said it was responsible. Thus, Professor Irving 
Fisher blamed the crisis on the lagging adjustment of the 
rate of interest in times of rising prices. 

The theory now generally accepted was worked out by 
Wesley C. Mitchell, the American economist. He made 
an exhaustive study of the facts concerning cycles in busi- 
ness and endeavored to combine the good in all of the 
theories which had preceded his into an explanation which 
would square with the facts. 

His theory aims to describe and account for the variations 
of activity that occur in business. The analysis is from 
the point of view of the entrepreneur, whose activities are 
controlled by costs, what he can get for his goods, the vol- 
ume of sales, the profit margins, and both short and long 
time credit arrangements. 

4. Rising Prosperity. — Mitchell chooses to start with 
the situation after a period of hard times or depression. 
Prime and supplementary costs of manufacture have de- 
clined. Stocks of goods in the hands of both wholesalers 
and retailers have become depleted. The liquidation of 
business debts which followed the crisis has been carried 
out. Interest rates are low, the banks have abundant re- 
serves, and so are in a position to increase loans. 



62 Introduction to Economic Problems 

The situation with respect to both depleted stocks of 
goods and the ease of securing money at low-interest rates 
encourage investors to begin the purchase of corporation 
securities. Conditions are ripe for a renewal of business 
activity. Sometimes a propitious event starts the upward 
movement; but even without such an event, improvement 
takes place. 

An increase in the demand for commodities in any one 
field brings increases in demand in those industries which 
furnish raw materials and supplies to the industries which 
handle the increased output, also to the industries which 
deal in complementary or substitution goods and to those 
industries which supply the personal needs of the workers 
in the flourishing industries. Thus, at the outbreak of the 
war in 1914, there was a demand for food and munitions. 
The demand for munitions caused a demand for iron, steel, 
and machine-tools. This caused a demand for iron ore, 
coal, and limestone. The workers in these industries de- 
manded more food, clothes, and better houses. The in- 
creased demand for butter caused oleomargarine to rise in 
price. Railroads feel any increase in business since it means 
more transportation of raw materials and finished products. 

In the matter of distribution of consumable goods, the 
sales of retailers cannot be increased much without causing 
buying from jobbers, and then the jobbers must soon buy 
from manufacturers. Each industry that is stimulated 
thus stimulates others. The increased railroad transporta- 
tion causes increased demand for steel from the railroads. 
After this process has been going on for some time, the 
spirit of the business man changes from pessimism to 
optimism. 

In the early part of the period of stimulated production 



Cycles in Trade and Industry 63 

there are certain factors which tend to keep prices down. 
As the scale of production increases, the cost per unit less- 
ens. The buyers are in a strategic position because for a 
long time orders have been scarce. Depression frequently 
breaks up combinations in business so that competition is 
keener. But prices eventually rise when the volume of 
business gets to that place where additional orders would 
require overtime work and new equipment. Combina- 
tions are re-established or new ones are formed, and buyers 
become anxious to purchase goods. Idle factories renew 
operations; others extend their plants, and new factories are 
started to provide for the rapidly increasing volume of sales. 
The rise in price of an article at any one stage of produc- 
tion raises the price at all subsequent stages, and the bid- 
ding of the manufacturers for raw materials passes back 
the rise to the earlier stages. The rise in prices is not even. 
Retail prices rise less quickly and to a less extent than the 
wholesale prices of the same commodities. This is ex- 
plained because custom is a more important factor in setting 
retail prices, and also some of the expenses of the retailers 
do not rise as rapidly as the wholesale prices of the prod- 
ucts. The wholesale price of finished commodities rises 
less rapidly than the price of the partially manufactured, 
and these in turn less rapidly than the price of raw materials. 
The explanation is similar to the case of retail prices since 
some of the manufacturing expenses do not rise as rapidly 
as the raw material. The wholesale price of manufactured 
goods used by consumers rises more quickly but to a less 
extent than the wholesale prices of manufactured goods 
used by producers. The wholesale prices of raw mineral 
products rise more rapidly than the wholesale prices of 
raw farm or forest products. This is due to the fact that 



64 Introduction to Economic Problems 

mineral production is more nearly under the control of 
business men. The other industries are affected by the 
seasons. Wages rise less rapidly than wholesale prices. 
This is due in most cases to the fact that the workers are 
not so well organized as the parties dealing in the other 
markets. Many of the laborers may be working under 
contracts which run for a considerable time. Also the full 
or over time employment gives a greater total wage al- 
though the wage rates may not be increased. 

Discount rates do not rise at once, but very soon the in- 
creased activity along with the higher prices brings an in- 
creased demand for loans that causes an increase in rates. 
Profits in general increase, because some of the costs rise 
less rapidly than the increase in the selling price of the 
product. With the general increase in the amount of 
profits, the prices of stocks early rise because dividends are 
assured and perhaps the rate is increased. The rise in 
stocks is likely to come early because the stock-brokers dis- 
count the anticipated rise in earnings. The amount of 
money invested in business increases because the prospect 
of profit leads to the extension of old enterprises and the 
starting up of new ones. With the growth of business con- 
fidence, investors are no longer so insistent on high-grade 
bonds and are willing to take more risks in stocks. 

5. The Development of Stresses. — This process of in- 
creasing prosperity involves many difficult problems. Will 
the demand for goods keep pace with the supply even at 
advanced prices? Will the cost of materials increase less 
rapidly than the selling price? Will the money incomes 
increase as rapidly as the cost of living? Will the bank 
reserves be ample to supply the increased banking liabili- 
ties? Prosperity inevitably brings a crisis. Supplemen- 



Cycles in Trade and Industry 65 

tary costs, such as rent, interest, and supervision soon be- 
gin to increase. Then contracts providing for goods or 
services at a low cost expire and the oflScials get higher 
salaries. Then the plant must be enlarged. The prime 
costs, such as labor and materials, have been increasing 
right along. Raw materials are more expensive. 

With respect to labor, there is a double increase in cost. 
Wage rates are advanced and the average efficiency of 
labor decreases. This is due partly to the taking on of less 
skilful men and partly to the lessening of discipline and 
partly to overtime work. The rates on bank loans grad- 
ually increase. This is an important item in a great many 
industries where the considerable part of the extension is 
carried on with borrowed capital. The business manage- 
ment becomes less efficient because the manufacturers are 
overrushed in increasing production. They do not secure 
the fullest utilization of material and labor. They do not 
wish to change their processes or methods of organization 
because the delay would result in decreasing production. 
The investment market soon develops a shortage of capital. 
Business men have been putting money back into their 
own business. Others who have been paying high prices 
for various products do not have a surplus to invest. Thus 
industries which manufacture equipment for other indus- 
tries are often first hit. For a long time they were unable 
to supply the demands of those who wanted to get new 
equipment and perhaps to increase their plants. As soon 
as the demand for commodities falls off the demand for 
equipment to make them also falls. 

Tension develops in the short-time money market. 
Many have extended their business operations on borrowed 
funds, and when a check comes to business prosperity they 



66 Introdiiction to Economic Problems 

find it necessary to continue their loans or even to increase 
them in order to protect their operations. The upward 
movement of prices does not affect all industries equally 
and cannot continue indefinitely. Certain prices are set 
by public regulation, such as the fares on street-cars. 
Some are set by contracts and some set by custom. The 
increased capacity of the various enterprises results in a 
larger volume of goods. This larger volume ordinarily 
cannot be sold at the old price. Whenever the construc- 
tion and work stop, orders for material and supplies fall 
off, and this causes a decrease in the prices. 

6. Crisis and Panic. — When the prices of a finished 
product have stopped rising more rapidly than the cost, 
profits decline and frequently some particular industry 
will be particularly hard hit and will get into difficulty. 
Sometimes an unfavorable event, such as crop failure, 
political disorder, uncertainty about monetary standards, 
the outbreak of war, prices in foreign countries, give a 
start to liquidation. Liquidation when once started spreads 
from one enterprise to another, from one trade to another, 
from one place to another. The debtor in trying to meet 
his obligations may attempt to get some one else to lend 
him, may put pressure on those who owe him money, may 
offer inducements to settle to those who owe him amounts 
not yet due, may sacrifice for cash the goods on hand, and 
may sacrifice securities or other property he holds. Any 
of these methods make the situation more difficult for 
others. The demand for loans becomes very great because 
those who will need money in the future add their demand 
to those who need money at once, because they wish to 
make sure that they will have the funds when they need 
them in the future. 



Cycles in Trade and Industry 67 

In the United States, before the Federal Reserve Act, 
this condition easily developed into a panic. The failure 
of business concerns resulted in bank suspensions or fail- 
ures. The market for loans and investments became de- 
moralized. Specie payments were suspended. Domestic 
exchange did not function in its ordinary way. Collec- 
tions became slow, prices of commodities fell rapidly. The 
fall in prices reverses the situation which we saw in the rise 
in prices. In other countries with central banks, and in 
the United States since we have the Federal Reserve Sys- 
tem, this short bank phase of panic is replaced by what is 
called a crisis. 

7. Depression. — Industries gradually readjust their prime 
costs because materials fall in price, wages are reduced, and 
interest rates are lowered. Supplementary costs for a 
while increase because the volume of business is less. But 
in many cases an insolvency brings about a permanent re- 
duction of fixed charges. In many cases the big values of 
appliances and equipment may be written down even 
though the company is not reorganized. New men buy 
old enterprises at lower cost, old loans are renewed at lower 
rates, new enterprises are started with low prime costs 
due to the improvement in the process or in the machinery. 
The physical volume of business after certain periods shows 
increase because the accumulated stocks of goods are grad- 
ually disposed of. Goods used by consumers and producers 
wear out and must be replaced, population increases, and 
in the later stages of depression there is a demand for pro- 
duction. Finally, we get to the point where we started, 
which may be called the end of liquidation. 

8. Mitigating the Crises. — Some people are in favor of 
scrapping our whole economic system because of depres- 



G8 Introduction to Economic Problems 

sions. Most economists would want to be very sure that 
what was put in its place would be better. They would 
retain our present economic order but attempt to prevent 
the great variation between prosperity and depression. 

One great advance has already been made in this coun- 
try. Formerly, because of our rigid banking and currency 
system, the crisis usually became a panic. The panic 
caused wide-spread ruin, many failed who should have 
been saved. The derangement of industry was greater 
than it should have been, and so the period of depression 
was prolonged. The Federal Reserve System has put an 
end to this condition. The banks can now meet all of the 
legitimate demands for credit or currency in time of crises. 

Possibly, the Federal Reserve Board may attempt to 
control credit expansion through the control of the rate of 
discount. There are three problems. In the first place, 
can the Federal Reserve Board control the rate of discount? 
At the start they could not because the banks did not need 
to rediscount at the Federal Reserve Banks. During the 
war they could control the rate, for nearly all of the banks 
were rediscounting. Because the Treasury Department 
wished low rates for government financing, the Federal 
Reserve Board did not try to raise rates. There is still a 
question as to how much rediscounting the member banks 
will do in normal times. 

The second question is whether the Federal Reserve 
Board, even if they had the power, would wish to exercise 
the control. We can imagine the outcry from interested 
business men if the Federal Reserve Board announced that 
business, was in danger of overexpansion and that an at- 
tempt would be made to check the expansion by raising 
the discount rate. Congress would probably intervene. 



Cycled in Trade and Industry 69 

Most business men are not yet ready to give the control 
of prosperity into the hands of any board. 

The third question is still more fundamental. How 
effective is raising the discount rate in checking expan- 
sion ? Interest is only one of the costs of doing business 
and in many cases, a minor one. In the case of dealing in 
stocks, a high call rate in 1920 did not check speculation. 
The chances for profit were so great that the men were 
willing to pay the high call rate. Obviously, the problem 
is one of checking certain overexpanded industries. There 
is danger that the increased interest rate will hit the con- 
servatively run industry. The speculative ones are either 
able, because of large profits, to pay the higher rate, or at 
least they are willing to take the chance. In the end, we 
shall probably be forced to fall back on the judgment of 
the local banker. He should be able from his knowledge 
of the borrowers to curb the ones who wish to over- 
expand. 

One proposal attacks the problem of unemployment in 
the period of depression. It is suggested that govern- 
ment work and public improvements, so far as possible, 
be done in periods of depression. Often in periods of 
prosperity the government adds its demand to the other 
demands and so helps in the expansion. Of course, this 
plan has its limitations. Much government work and 
many public improvements cannot well be postponed. 
Then again, all who are out of work could not be given 
work at such enterprises. Naturally, the physically strong 
could do common labor, but that would hardly be satis- 
factory. 

In the chapter on Social Insurance is discussed the prob- 
lem of providing insurance for unemployment. 



70 Introduction to Economic Problems 

Another suggestion is that business men should be edu- 
cated in the knowledge of the business cycle. Business 
forecasting should be developed in such a way that the 
business man, knowing what was about to happen, could 
be prepared for it. 

9. Exercises. — i. {a) Distinguish between a panic and 
an industrial depression. 

{b) Were there panics under the manorial system in 
England ? 

(c) Trace the connection between our present economic 
organization and the existence of crises. 

2. To what extent could we have crises if we did not 
have a credit system? 

3. Illustrate from the clothing industry the interdepen- 
dence of modern business. 

4. (a) How may a boll-weevil pest in the cotton-crop 
of Texas affect the production of woolens ? 

(6) Show how an automobile manufacturer is affected 
by the fortunes of his customers, his competitors, and 
those who sell supplies to him. 

5. List the reasons why credit instruments are not 
always met at maturity. 

6. Trace the interests, in time of depression, of business 
men, workers, and consumers with reference to the volume 
of goods to be produced. Is the course which yields the 
most profit to the business man the one which best pro- 
motes the public interest? 

7. Trace the effect of price changes on profits. 

8. Why do not retail and wholesale prices move to- 
gether? raw materials and finished products? railroad 
rates and steel rails? the rate of wages and the cost of 
living ? 

9. {a) Why do not prices during periods of prosperity 
keep on rising indefinitely? 

{h) In what way is the movement in the price of a par- 



Cycles in Trade and hidustry 71 

ticular commodity, say cotton cloth, affected by an up- 
ward move in the general level of prices ? 

10. Explain how liquidation spreads. 

1 1 . Indicate the problem of the banker in times of pros- 
perity and in times of depression. 



CHAPTER V 

THE OPERATION OF THE FEDERAL RESERVE 

SYSTEM 

I. The Weekly Statement. 2. Cash Items^Operation of the Gold 
Settlement Fund. 3. Bill Holdings — Trade Acceptances. 4. United 
States Bonds and Certificates. 5. The Banking-House. 6. The Col- 
lection System. 7. The Capital Liabilities. 8. Deposits — Services for 
the Government — Mobilization of Reserves. 9. Notes of the Banks. 
10. Other Liabilities — Earnings. 11. The Reserve Ratios. 12. The 
Discount Policy of the Federal Reserve Board. 13. The Aid to Foreign 
Trade. 14. Summary of Benefits of the System. 15. Exercises. 

1. The Weekly Statement. — Perhaps the best way to 
study the operation of the Federal Reserve System is to 
consider the statement of resources and liabilities as given 
out each week. 

Resources 

2. Cash Items — Operation of the Gold Settlement Fund. 

— Gold Coin and Certificates. — Since the United States is 
on the gold standard, all obligations of the Federal Re- 
serve Banks are ultimately payable in gold. Thus, we 
see that gold coin and certificates make a very important 
item. The certificates, it will be remembered (Turner's 
Introduction, page 214), are issued by the United States 
Treasury on the deposit of gold coin. 

Gold Settlement Fund, Federal Reserve Board. — In Tur- 
ner's Introduction, page 300, the workings of the local 
clearing-houses have been explained. The Gold Settle- 
ment Fund of the Federal Reserve Board serves the same 
purpose. It would be impossible for the representatives 
of the twelve Federal Reserve Banks scattered all over the 
country to get together in any one place to offset the 

72 



The Federal Reserve System 73 



FEDERAL RESERVE STATEMENT. 

RESOURCES. 

Sept. 21, 1921. Sept. 14, 1921. Sept. 24, 1920. 

Gold and gold certificates $428,036,000 $446,642,000 $183,826,000 

Gold settlement fund — Federal Re- 
serve Board 411,210,000 441,109,000 341,303,000 

Gold with foreign agencies 111,455,000 

Total gold held by banks $839,246,000 $887,751,000 $636,584,000 

Gold with Federal Reserve agents . . 1,777,529,000 1,694,301,000 1,211,619,000 

Gold redemption fund 94,353,000 102,449,000 141,632,000 

Total gold reserves $2,711,128,000 $2,684,501,000 $1,989,835,000 

Legal tender notes, silver, &c 151,968,000 150,001,000 161,759,000 

Total reserves $2,863,096,000 $2,834,502,000 $2,151,594,000 

Bills discounted: 

Secured by U. S. Government 

obligations 495,156,000 503,677,000 1,220,423,000 

All other 892,081,000 924,485,000 1,484,041,000 

Bills bought in open market 33,514,000 40,712,000 307,624,000 

Total bills on hand $1,420,751,000 $1,468,874,000 $3,012,088,000 

United States bonds and notes 38,081,000 33,729,000 26,877,000 

U. S. certificates of indebtedness: 

One-year certificates (Pittman act) 184,875,000 187,875,000 259,375,000 

All other 8,571,000 19,803,000 11,248,000 

Total earning assets $1,652,278,000 $1,710,281,000 $3,309,588,000 

Bank premises 29,111,000 28,877,000 15,370,000 

5% redemption fund against Federal 

Reserve Bank notes 8,917,000 8,845,000 11,824,000 

Uncollected items 591,811,000 641,279,000 817,843,000 

All other resources 16,448,000 16,801,000 6,056,000 

Total resources $5,161,661,000 $5,240,585,000 $6,312,275,000 

I.IABII.ITIES. 

Capital paid in $103,017,000 $102,982,000 $97,401,000 

Surplus 213,824,000 213,824,000 164,745,000 

Reserved for Government franchise 

tax 50,777,000 50,101,000 

Deposits; 

Government 74,183,000 49,219,000 46,493,000 

Member banks— Reserve account. 1,588,209,000 1,631,038,000 1,800,677,000 

All other 29,218,000 25,574,000 34,910,000 

Total deposits . $1,691,610,000 $1,705,831,000 $1,882,080,000 

Federal Reserve notes in actual cir- 
culation •.•■■.•• 2,474,676,000 2,491,651,000 3,279,996,000 

Federal Reserve Bank notes in cir- 
culation— Net liability 103,590,000 103,078,000 214,180,000 

Deferred availability items 503,174,000 553,235,000 595,342,000 

All other liabilities 20,993,000 19,883,000 78,531,000 

Total liabiUties $5,161,661,000 $5,240,585,000 $6,312,275,000 

Ratio of total reserves to deposit and 
Federal Reserve note liabilities 

combined 68.7% 67.5% *43.6% 

Ratio of gold reserves to Federal Re- 
serve notes in circulation after set- 
ting aside 35% against deposit 

liabilities 91.8% 89.8% *74.9% 

* Calculated on basis of net deposits and Federal Reserve notes in circulation. 



74 Introduction to Economic Problems 

obligations arising in the course of business. So the proce- 
dure indicated below is followed. The Federal Reserve Board 
has a system of private wires connecting all of the Federal 
Banks and branches. Every business day, each bank and 
each branch telegraphs in to the Federal Reserve Board 
in Washington the amount of obligations which are due 
them from the other banks and branches. Each bank has 
on deposit in the Treasury at Washington under the con- 
trol of the Federal Reserve Board a certain minimum 
amount of gold. The debits and credits of each individual 
bank are offset by the Federal Reserve Board, and changes 
in the ownership of this gold are made to settle the bal- 
ances to be paid or the balances due. 

Gold with Foreign Agencies. — As an incident to the 
transactions with our allies during the war, the Federal 
Reserve Banks held a certain amount of gold with banks 
abroad. It will be noticed that no amount is given in the 
statement for this year. 

Gold with Federal Reserve Agents. — We shall see later 
that Federal Reserve notes may be issued against the de- 
posit of gold with the Federal Reserve agent. This gold 
is also used as part of the reserve held against the notes 
and so comes under the heading Resources. 

Gold Redemption Fund. — The Federal Reserve notes are 
redeemable in gold at the Treasury in Washington, so it is 
necessary for the Federal Reserve Banks to provide the 
Treasury with gold to meet the demand for redemption. 
The law specifies that a fund of at least 5 per cent shall be 
held in the Treasury. This appears in the statement as 
the gold redemption fund. 

Legal Tender Notes, Silver, etc. — Included under this 
heading are the greenbacks or United States notes, the sil- 



The Federal Reserve System 75 

ver certificates and silver coin. The variations which have 
taken place have been partly due to the sale and repur- 
chase of silver under the Pittman Act. The items consid- 
ered so far make up the total reserves. It will be remem- 
bered that the bank must hold 40 per cent of the outstand- 
ing Federal Reserve notes in gold and 35 per cent of the 
deposits in gold or lawful money. 

3. Bill Holdings — Trade Acceptances. — Bills Discounted 
Secured by Government War Obligations. — ^The theory of the 
Federal Reserve System is that it is to deal in commercial 
paper. The law provides that money borrowed from the 
Federal Reserve Banks cannot be used for the purpose of 
speculation in stocks and bonds. Therefore, notes secured 
by stocks and bonds as collateral cannot be rediscounted 
with the Federal Reserve Banks. An exception is made 
for notes secured by obligations of the United States Gov- 
ernment. The idea, of course, is that all the banking 
facilities of the country should be at the service of the gov- 
ernment if necessary. The notes secured by government 
war obligations are of two general types. First, the col- 
lateral notes of the member banks secured by government 
war obligations; this means that the borrowing bank gives 
its own note to the Federal Reserve Bank and offers as 
security government war obligations. Second, other dis- 
counted bills secured by war obligations; this means that 
member banks take the notes of their customers which are 
secured by government war obligations and rediscount 
them with the Federal Reserve Banks. 

Bills Discounted, All Other. — This item includes member 
banks' collateral notes, secured otherwise than by govern- 
ment war obligations. The law provides that banks may 
borrow from the Federal Reserve Bank and offer as col- 



76 Introduction to Economic Problems 

lateral bills and notes which would be eligible for redis- 
count. It has been a common practice of the banks to 
borrow on lifteen-day notes and offer as collateral notes of 
their customers which could be rediscountcd, which run 
perhaps for thirty to sixty days. Obviously, it is simpler 
to do this than it would be to rediscount a large number of 
notes of comparatively small denomination. Another ad- 
vantage, of course, is that the bank may not have notes 
on hand which mature in the short period for which they 
desire to borrow the money. 

Bills BougJd in the Open Market. — ^The Federal Reserve 
Act permits the Federal Reserve Banks to engage in what 
are called "open-market transactions." The primary pur- 
pose of this permission is to enable the banks to control 
the movement of gold in foreign exchange. Thus, they 
are permitted to buy certain types of foreign bills of ex- 
change, but also they may buy certain types of bills in the 
domestic market. It has been the hope of many people 
that we could introduce in this country the settlement of 
obligations by trade acceptances. The Federal Reserve 
Board, the National Association of Credit Men, and the 
American Bankers' Association all have co-operated in a 
camjiuign to educate the American business men in the 
use of the trade acceptances. The trade acceptance is in- 
tended to supplant the method of selling goods on open 
account; that is, the selling of goods where no record is 
made of the transaction except on the books of the parties 
concerned. When the trade acceptance is used, the seller 
of goods draws a draft on the purchaser. In brief, this 
draft is addressed to the buyer by the seller and says: 
"Pay to the order of ourselves so many dollars." On the 
face of the draft is an indication of the transaction out of 



The Federal Reserve System 11 

which the draft arises. This draft when presented to the 
purchaser is "accepted" by him if the goods have arrived 
in satisfactory condition. The purchaser writes "accept- 
ed," signs his name, and makes the draft payable at a 
certain bank at a certain time. The acceptance then be- 
comes his promise to pay. The big dechne in the total of 
bills on hand shows the effect of declining prices and de- 
pression on bank borrowing. 

In foreign trade, the bankers' acceptance is used to 
greater extent. This is explained in the chapter on Foreign 
Exchange. 

4. United States Bonds and Certificates. — United Stales 
Government Bonds. — The holdings under this title are the 
result of the provisions of the Federal Reserve Act which 
were intended to get rid of the national bank note circula- 
tion. The national bank notes are secured by the deposit 
of government bonds. Because of the profit involved in 
the issue of notes, the government was able to sell bonds 
to be used to secure notes which bore the low rate of in- 
terest of 2 per cent. Any plan to retire the national bank 
notes had to make provision for relieving the banks of 
these bonds. The amount held in the banks at the time 
of the passing of the act was about $740,000,000. The law 
provided that each year the Federal Reserve Banks should 
buy, if the Federal Reserve Board directed, $25,000,000 
worth of these bonds from the national banks. The Fed- 
eral Reserve Banks might issue Federal Reserve Bank notes 
against these bonds, or they might have half of them 
changed into 3 per cent thirty-year bonds and the other 
half into 3 per cent one-year gold notes of the government 
which were to be taken on the agreement to purchase at 
the end of the year an equal amount of one-year gold notes 



78 Introduction to Economic Problems 

and repeat the process for thirty years. Because the war 
bond issues were at a higher rate than 3 per cent, the Fed- 
eral Reserve Board has not required the banks to buy bonds 
from the member banks since the war. 

United States Certificates of Indebtedness. — This item is 
composed of two kinds of certificates of indebtedness. 
First, the certificates of indebtedness issued by the govern- 
ment for short-term financing. The Federal Reserve 
Banks have always taken a certain amount of these. The 
second type of certificate is the one-year certificate. One- 
year certificates of indebtedness were issued under the 
terms of the Pittman Act, to be deposited as security for 
an issue of Federal Reserve Bank notes. These notes took 
the place of the silver certificates which had been backed 
up by the silver dollars melted for bullion under that act. 
As the silver is repurchased, these certificates will be re- 
tired. We may expect considerable variation in the amount 
of the other type of certificates of indebtedness. Just be- 
fore payment of interest on Liberty bonds is due, the 
government may borrow on short-term certificates from 
the Federal Reserve Banks. As the investment market 
improves, presumably the certificates of indebtedness 
will get more and more into the hands of the investing 
public. 

5. The Banking-House. — Bank Premises. — The banks, 
of course, must have quarters in which to carry on their 
business. In most of the cities, the banks have purchased 
real estate upon which they will later build. Since the 
earnings have been great, the banks have followed a very 
conservative course in the matter of writing off the cost of 
the buildings located on the real estate purchased where 
they intend to tear down the buildings later. 



The Federal Reserve System 79 

Five Per Cent Redemption Fund against Federal Reserve 
Bank Notes. — Federal Reserve Bank notes, just as national 
bank notes, are secured by government obligations and a 
fund equal to 5 per cent of the notes outstanding is de- 
posited in the Treasury at Washington for redemption of the 
notes. The fund need not be gold, it may be lawful money. 

6. The Collection System. — Uncollected Items. — This 
heading covers a large number of items, many of which are 
small in amount. "Due from foreign banks" is a small 
item now. National bank notes are not legal tender and 
so could not be counted above in stating the resources. 
They are, however, assets of the Federal Reserve Bank 
which holds them. Bank-notes of other Federal Reserve 
Banks according to the law cannot be paid out by the 
Federal Reserve Bank under the penalty of 10 per cent. 
So these two items could not be used as reserve. Federal 
Reserve notes of the other Federal Reserve Banks come 
under the same rules. Unassorted currency is an asset, 
but until it has been assorted it cannot appear in a state- 
ment under other holdings. The largest single item in this 
classification consists of transit items. 

One of the functions of the Federal Reserve Bank is to 
act as a clearing-house for the member banks of its district. 
Previous to the start of the Federal Reserve System, checks 
received by a bank on banks outside of its own city were 
collected usually through correspondent banks. 

Under the National Banking System, banks in all cities 
except New York, Chicago, and St. Louis were permitted 
to count as reserves balances in central reserve or reserve 
city banks. These balances, besides being used as reserves, 
were the basis of the system of domestic exchange. When 
a customer of a bank desired to make payment at a distance 



80 Introduction to Economic Problems 

and did not wish to send his own check, he got from his 
bank a bank draft, that is, the bank's check on its deposit 
in another city. Usually, of course, the draft was on a 
New York bank. Banks in reserve and central reserve 
cities paid a small rate of interest, usually 2 per cent, on 
these balances. It was to the advantage of the bank to be 
able to make this small earning on the money which was 
also functioning as a reserve. The banks ordinarily built 
up their balances in the reserve city banks by sending checks 
which they had received which were drawn on banks out- 
side of their own city. Thus, the depositing of reserves, 
the drawing of drafts, and the check collection system 
tended to concentrate funds in New York. One of the 
purposes of the Federal Reserve Act was to cause a decen- 
tralization of banking. We will see how the Federal Re- 
serve System provides for the collection of checks. Each 
bank may send to the Federal Reserve Bank of its district 
all the checks on other banks which it has received in the 
course of business. The Federal Reserve Bank credits the 
bank at par for these checks, but the credit is not always 
made the day it is received. 

The banks of the country are divided into classes accord- 
ing to the length of time which it takes for the Federal 
Reserve Bank to send the item to the bank and get the 
bank's payment for it. These classes are one day, two, 
three, four, live, six, and eight days. The bank gets credit 
then, at the end of this period, for the total amount of the 
checks. The bank to which the check is sent usually pays 
the check by drawing on its balance at the Federal Reserve 
Bank. This balance is built up by sending checks on other 
banks which it has received in the course of business. Thus, 
the Federal Reserve Bank, in practice, performs the same 



The Federal Reserve System 81 

function as the clearing-house does for banks in a given 
city, since most of the checks to be collected are sent to 
the Federal Reserve Bank, and the payment is actually 
made by offsetting the debits and credits of the various 
banks. It is the aim of the Federal Reserve Board to have 
this system of check collection cover the entire country. 
So, not only member banks, but all banks are urged to 
utilize this system. The law provides that non -member 
banks may carry balances with the Federal Reserve Banks 
for the purpose of meeting payment of checks. The Fed- 
eral Reserve Board has been successful in getting a very 
large proportion of the banks of the country to join the 
system. In almost all of the districts all the banks have 
agreed to remit for their checks at par. In some of the 
States in the South and West opposition has been encoun- 
tered and the system is still incomplete. A member bank 
may send a check on a bank in another district to the Fed- 
eral Reserve Bank of that district and get credit in its own 
Federal Reserve Bank. The settlement between Federal 
Reserve Banks is made by the Gold Settlement Fund, 
which was mentioned above. 

Liabilities 
7. The Capital Liabilities. — Capital. — The capital of the 
twelve Federal Reserve Banks at the end of the respective 
years has been as follows: 

Capital of Federal Reserve 
End of Year Banks in thousands 

1914 $18,051 

I915 54-913 

I916 55,694 

I917 70,442 

1918 80,767 

I919 87,407 

1920 '. 99,770 

I921 103,186 



82 Introduction to Economic Problems 

This increase in capital is due to three factors. The law 
provided that each member bank should subscribe for 6 
per cent of its capital and surplus in the stock of the Federal 
Reserve Bank. One-sixth of this subscription was to be 
paid at the call of the Federal Reserve Board; another one- 
sixth within three months after that, and another one- 
sixth within six months after the first call. That is, one- 
half of the subscribed capital was to be paid in. The other 
half was to remain as an unpaid subscription. At the end 
of the year 1914, only one payment had been made, so part 
of the increase which comes in the year 19 15 was due to 
the fact that two more instalments were paid. Whenever 
a member bank increases its capital or surplus, it must 
subscribe to an extra amount of capital stock in the Federal 
Reserve Bank. Whenever a new national bank is formed, 
it also must subscribe the same amount as the national 
banks which were in existence at the time when the law 
was passed. A state bank becoming a member makes the 
same subscription as the national bank. The big increase 
in the capital due to the membership of state banks comes 
in the year 1918. In the fall of 1917, the President of the 
United States issued an appeal to the state banks to join 
the Federal Reserve System in order to strengthen the 
financial position of the country in the prosecution of the 
war. This appeal was largely heeded in both 191 7 and 1918. 
The increasing volume of business, due to the rising prices 
and to the activity of war times, caused a great number of 
banks to increase their capitalization, and this has been re- 
flected in the growth of the capital of the Federal Reserve 
Banks. 

Surplus. — The surplus of the Federal Reserve Banks is 
closely connected with the earnings of the banks, for it is 



Thr h'nlnnl Hr.'urvr Hy.^lnii W^ 

Irom lln* (*x( ("iii ul (ill iiiii)^;s over I lie «livi<l<ii<l r«(jiiii(iiitii( 
tliiil llir ^ill^|)l(^^ IiiimI iii lo lie jh < iimiilnhMl. Al lir;;l lli*- 
Fedeml Reserve HanlcH li;i<l miher small earnings. Tin . 
WMH (lilt* to (he biiHlneHs siLualion at the time bankn were 
Htii-rlnl. 'I'lir yrar 1014 waH a year of (lej)reHrtion, Shortly 
afIrT llii- Mliirl ul (li<^ war, hrrniirti:* we wt^re it iKMitiiiJ luilion 
wilh laii'c ;,ti|)|>lir:, ol lood .iiid iiiiiiiil ioiiH, WG began tO Sell 
vai-it (|uaiililic;i ol /.Mioih lo I'liiiopr. 'I'Im- payiiM^iil of 
thene goodw wa,4 made partly in I In- kIiuii ol Aineiitaii 
Hecuritles held abroad, but partly in i-old As a result the 
United States received over $j, 000,000,000 in K"ld from 
abroad, 'V\\h lar^e sum of gold, along with tlif* lertHtMmd 
reserve rerjin'rcoK'nlrt enactt^rl by Ihe I'edf^nil Kewerv*" Arl, 
gave a surplo; ol l<.;iii;d)l< iuiid. in mo, I ol (liebanks. I'oi 
the first I w<t 01 Ihirc ycarii the I'cdi'ral Kt-atJivt^ Thinks made 
very little more than expennes, ho no Hurpluy wan aecu 
mulated. The original act provided that after the 6 per 
cent cumulative diviclend li;id l»een paid on the stock, one- 
half of the net earnings iJiould go to siirphiii iiiilil lh<' liiir 
pluH WfiH 40 i)er ( rill of I he I'liiil ill (apilal slo< K ol lli< himl'. 
'I'lii;; was aniendr.l in KjH) lo |»rovide that all ol the net 
earningH a,bove llie dividend fim haling those ol h^iH) 
should go to surplus iinlil (h<* surplus was 100 pei (tut ol 
the mbscribed capital, and allci il had reached this amount 
that 10 per cent of the net earnings after dividends should 
go to what is sometimes called the siipersiir})lus. All I hat 
does not go to siirpliii, \>Ui-J, lo Ihe j-'overnmcnl a;i ;i lr;in< liise 
tax and may be used hy lli< i^-ov. mhik id lo kIih- ind<|j|<d 
ness of the (Jnlled Slates or to stren^'M"" IIh- ;.'old h;,«-i vf 
baek of IIm- United Sta-les noirs Willi lli< <oiiiiii}', ol Ihe 
war and lli<- vast amounl ol ;.'/*7< iniin nl Iih.iik iiik,, • he 

facilities of the Federal Reserve Ranks were utili>jed very 



84 Introdiiciio7i to Economic Problems 

largely. People were urged to buy bonds with borrowed 
money. The banks rediscounted these notes of the bor- 
rowers with the Federal Reserve Banks. So, in a sense, 
we may say that the bonds were purchased by the expan- 
sion of bank credit in the form either of Federal Reserve 
notes or of deposits in the Federal Reserve Banks. In 
order to facilitate the financing, the Federal Reserve Banks 
kept the rate of rediscount low. Thus, although the volume 
of rediscounts was very large, the earnings did not increase 
as much as they did later when the Federal Reserve Board, 
feeling that the obligation to those who had borrowed to 
buy bonds had been fulfilled, authorized the Federal Re- 
serve Banks to raise the rediscount rate. This took place 
during the post-armistice boom in business, when there was 
still greater expansion of note issues and deposits. The 
result of increased rates and higher discount rates meant 
enormous earnings, so it will be noticed that the surplus of 
the banks as a whole is over twice as great as the paid-in 
capital stock. 

Reserved for Government Franchise Tax. — This item is ex- 
tremely important, as it enables us to get a rough estimate 
of the earnings each week. Nine-tenths of the net earn- 
ings after dividends goes to the government, so ten-ninths 
of the increase in this item represents, roughly, the earn- 
ings for the week. 

8. Deposits — Services for the Government — Mobiliza- 
tion of Reserves, — Government Deposits. — The Federal 
Reserve Banks act as fiscal agents for the government. 
The law gives the secretary of the treasury the option 
whether he shall deposit the government funds with the 
bank or not. Most European governments keep all of 
their funds in banks. We still have the independent 



The Federal Reserve System 85 

treasury system, started in 1846, when the banks of the 
country were really not sound and it was wise for the gov- 
ernment to take care of its own funds. The system was 
modified after the passage of the National Bank Act by 
making the national banks depositaries. It is hoped that 
eventually we will do away entirely with the independent 
treasury system. The amount of government deposits has 
been cut down since the close of the war. Already the sub- 
treasuries have been abolished. The Federal Reserve 
Banks handle the issue and repayment of certificates of in- 
debtedness for the Treasury Department in the United 
States. They pay the interest on the Liberty bonds and 
take charge of the issuing of the permanent bonds in place 
of the temporary bonds first issued. The United States 
Government bears the cost of these fiscal agency services. 
Due to Members. — Reserve Account. — This item points to 
one of the great achievements of the Federal Reserve 
System; namely, the mobilization of reserves. Under the 
former system part of the reserve was held in the individual 
bank, and in times of crisis, one bank might have abun- 
dant reserve while another was greatly in need of reserves, 
but there was no easy way by which reserves could be 
transferred from one bank to another. We have seen that 
in times of emergency, by means of clearing-house loan 
certificates, a rather crude method of meeting the situation 
was devised. The part of the reserve which was held in 
New York was obviously insufficient to meet the demands 
of all the banks, who feared that they might need the 
reserve and so called for it whether they really did need it 
or not. The original act provided for a scheme of reserves 
in which part was to be held in the bank itself, part in the 
Federal Reserve Bank, and part in either. An amend- 



86 Introduction to Economic Problems 

ment during the war reduced the reserve requirement and 
provided that it should all be held in the Federal Reserve 
Bank. Of course, the bank must still hold some funds in 
its own vaults, but the law allows each bank to use its 
own judgment as to the amount which shall be so held. 
Now, any bank which is in difficulty can utilize the reserve 
held in the Federal Reserve Bank by means of rediscount- 
ing paper with the Federal Reserve Bank. In this way it 
can get Federal Reserve notes if its depositors are demand- 
ing cash, or it can get a deposit credit at the Federal Re- 
serve Bank which can be used as reserve for an increase in 
deposits given to those who wish to borrow money. 

Other Deposits. — This item includes the credits of foreign 
governments, which were of considerable importance dur- 
ing the war but which now are rather small in amount. 
It also includes the balances held by non-member banks 
for the purpose of clearing, as was explained above in the 
account of the check collection system; and also three 
items — ^cashiers' checks, Federal Reserve exchange drafts, 
and Federal Reserve transfer drafts. It is seen that these 
are outstanding liabilities of the bank not yet presented 
for payment. 

9. Notes of the Banks. — Federal Reserve Notes in Actual 
Circulation. — The figure for notes in actual circulation is 
obtained by subtracting from the notes outstanding those 
held by the bank and branches and those forwarded for 
redemption. It is interesting to see that the amount of 
Federal Reserve notes in circulation is larger than the 
amount of any other kind of money. The war decided 
the question of elasticity on the one side, that is, of expan- 
sion; and the notes proved adequate to meet every de- 
mand. We have not yet seen whether they will contract 



The Federal Reserve System 87 

as easily as they expanded. There has been some con- 
traction. The original act provided that these notes 
should be backed by loo per cent short-time commercial 
paper and 40 per cent gold reserve. During the war, this 
was changed to the requirement that they should be 
backed by 100 per cent of gold and commercial paper, at 
least 40 per cent of which must be gold. The accounts of 
the bank show that they always carry more gold and com- 
mercial paper than the law requires. 

We may trace the way in which these notes expand to 
meet the demands of trade. If a bank has an increased 
demand for loans, it may rediscount some of its notes at 
the Federal Reserve Bank in order to provide for the new 
loans. The Federal Reserve Bank may deposit this paper 
with the Federal Reserve agent and get in return Federal 
Reserve notes. Thus, we see that the increasing demands 
in business which show themselves in the increased amount 
of commercial paper furnishes the basis for the increase in 
note issue. On the other hand, if the total volume of 
loans of the bank is decreasing, it will pay its rediscounts 
at the Federal Reserve Bank at maturity instead of replac- 
ing them with other rediscounts. The payment will be 
made to the Federal Reserve Bank in the form of money 
or credit instruments redeemable in money. The Federal 
Reserve Bank in order to get back the collateral must 
deposit with the Federal Reserve agent Federal Reserve 
notes or lawful money. It might be that the bank would 
send in Federal Reserve notes and the Federal Reserve 
Bank could deposit them directly. If some other form of 
money is deposited with the Federal Reserve agent, the 
amount of Federal Reserve notes outstanding may not be 
decreased immediately, but ultimately the notes will be 



88 Introduction to Economic Problems 

returned for redemption and the other forms of money 
deposited will be paid out for this purpose. 

Federal Reserve Bank Notes in Circulatioii, Net Liability. 
—This amount is obtained by subtracting the bank-notes 
held by banks and branches from the total outstanding. 
These Federal Reserve Bank notes are similar to the 
national bank notes; that is, they are secured by the 
deposit of government obligations. Those outstanding are 
due to two operations of the Federal Reserve System. The 
first resulted from the taking over of bonds by the Federal 
Reserve Banks as part of the provision for the retirement 
of the national bank notes. Second, some resulted from 
the operation of the Pittman Act, which was explained 
above. The decision to use Federal Reserve Bank notes 
instead of Federal Reserve notes to replace the silver cer- 
tificates which were retired when the silver dollars were 
melted up was based on the fact that 5 per cent instead 
of 40 per cent gold reserves would need to be kept against 
them. 

Deferred Availability Items. — ^This item corresponds to 
the entry "Uncollected Items" under resources. We have 
seen that in the check collection system certain items are 
not available until after a certain period. These items are 
liabilities which are not yet due. To make this clear, sup- 
pose a member bank sends in a check on another bank. 
This check appears once as a deferred liability of the Fed- 
eral Reserve Bank since it, in two days or so, will owe the 
bank sending the check in the amount of the check. It 
appears once as a deferred asset because, at the end of the 
two days, the Federal Reserve Bank will have a claim on 
the bank on which the check was drawn. The two deferred 
items should be approximately the same in amount. 



The Federal Reserve System 89 

10. Other Liabilities^ — Earnings. — All Other Liabilities. 
— This is an extremely important subdivision, made up of 
a large number of items. It includes the item which ap- 
pears in the ordinary bank statements as undivided profits. 
It includes the earnings which arise from the discount on 
bills discounted, the discount on bills purchased, the inter- 
est on United States securities, and the penalties on deficient 
reserves. This last item calls attention to the fact that if 
member banks do not keep the reserve required by law they 
are fined by the Federal Reserve Bank. From these gross 
earnings are deducted the current expenses, and this gives 
the current net earnings. From the current net earnings, 
the dividends paid are deducted. The amount left is avail- 
able for surplus and the franchise tax. As was indicated 
above in considering surplus the banks have pursued a 
liberal policy in setting up reserves and in writing off costs 
for furniture, fixtures, vault, etc. To the amount of net 
earnings is added the unearned discount and from this 
sum the interest accrued on United States securities is 
subtracted. This gives the total as it appears in the 
balance-sheet. 

11. The Reserve Ratios. — At the foot of the table is 
given the statements of percentage of reserves. This is 
given in two forms; the important one is the percentage of 
total reserves to deposit and Federal Reserve note liabilities. 
In the earlier statements, uncollected items and other de- 
ductions from gross deposits were subtracted from the total 
on which reserve was to be held and the deferred availa- 
bility items were added. In March, 192 1, this practice 
was discontinued, and so now the statement is on the basis 
of deposit liabilities and note liabilities compared with the 
actual reserve. 



90 Introduction to Economic Problems 

12. The Discount Policy of the Federal Reserve Board. 

— The Federal Reserve Banks are operated for public ser- 
vice, not for profit. So the Federal Reserve Board need 
not be hampered by consideration of profit in carrying out 
its policies. 

The board aims to make the discount rates more equal 
throughout the country. We need not expect the rates to 
be exactly uniform. One of the advantages of the system 
of regional banks over a central bank is the possibility of 
varying the rates in the different sections of the country. 
For high rates are not entirely an indication of a lack of 
capital. They are due partly to the greater risks in the 
newer sections. If one Federal Reserve Bank needs funds 
another will rediscount for it. Thus, the supply of funds is 
equalized throughout the country and the discount rates 
made more uniform. 

During the war the discount policy of the Federal Re- 
serve Banks was shaped to aid in the government financing. 
The secretary of the treasury wished to float the loans be- 
low the normal rate of interest. To do this it was neces- 
sary to keep the rate of discount in the money markets 
abnormally low. This low rate was obtained by having 
the Federal Reserve Board set low rates of rediscount. 
To aid in the sale of bonds on credit, the Federal Reserve 
Banks gave a still lower rate on loans secured by govern- 
ment war obligations. 

The post-armistice boom brought a big expansion of bank 
credit. The Federal Reserve Board felt bound to allow 
the rates to remain low for a year, since promises had been 
made to that effect during the loan campaign. So the 
efhcacy of high discount rates in checking expansion was 
not tested. The reserves of the Federal Reserve Banks 



The Federal Reserve System 91 

fell to near the danger-line. So after the year was over, the 
Federal Reserve Banks raised rates vigorously. Deflation 
followed, and of course some of those hit blamed it on the 
policy of the Federal Reserve Board. The better opinion 
seems to be that the prices could not have been maintained 
anyway in the face of increased production and the falling 
off of the war demand. The main object of the Federal 
Reserve Board, the improving of the percentage of reserves, 
was accomplished. 

In the chapter on Cycles in Trade and Industry is dis- 
cussed the possible policy of the Federal Reserve Board in 
the control of credit expansion. An allied problem is the 
protection of the gold supply of the country from with- 
drawals for shipment to other countries. Just now the 
question is, rather, how to prevent the accumulation of too 
much gold in the United States. However, after recon- 
struction has been achieved, there will no doubt be times 
when we wish to protect our stock of gold. The Bank of 
England used to prevent gold from leaving England by 
raising the discount rate. The efficacy of the measure de- 
pended upon its attracting loanable funds from other money 
centres. London was a great bill market, and at that 
time, a free gold market. So lenders were sure that their 
funds could be invested to take advantage of the high rate 
and that when they wanted the funds back again, they 
could have them in gold. The Federal Reserve Board is 
aiding in developing a market for bankers' acceptances in 
New York. This will provide the bill market. We 
are at present the only large free gold market in the world. 
Thus, the factors are all favorable for the use of this 
device if the banks are rediscounting enough at the 
Federal Reserve Banks to force them to follow the 



92 Introduction to Economic Problems 

Federal Reserve Banks' rate in setting the rate on 
bankers' acceptances. 

13. The Aid to Foreign Trade. — Foreign trade is facili- 
tated by banks in foreign countries controlled by our own 
citizens. Often in the past our dealers have complained 
that the foreign banks through which they dealt aided their 
competitors. The Federal Reserve Act helps in several 
ways in providing banking facilities abroad. In the first 
place, national banks with a capital and surplus of one 
million or over may establish, under the control of the 
Federal Reserve Board, branches in foreign countries. In 
the second place, national banks may subscribe up to 10 
per cent of their capital and surplus in the stock of banks 
doing a foreign banking business. Again the act provides 
for the chartering of corporations which are authorized to 
do a foreign banking business under the supervision of the 
Federal Reserve Board. Action has been taken under 
these provisions. The depression in foreign trade will pro- 
vide a severe test for such institutions. 

14. Summary of Benefits of the System. — In brief, the 
Federal Reserve System has unified our banking system, 
centralized reserves, given an elastic currency, made pro- 
vision for foreign banking, aided in financing the war, pre- 
vented crises degenerating into panics, improved the facili- 
ties for collecting checks, provided facilities for financing 
foreign trade, helped make bank assets more liquid, and 
made a start at controlling discount rates and the inter- 
national movement of gold. 

15. Exercises. — i. Why not have a Gold Settlement 
Fund for international obligations? 

2 . Should Federal Reserve Banks be permitted to discount 
bills or notes secured by government bonds in time of peace ? 



The Federal Reserve System 93 

3. Explain how the Federal Reserve Banks can control 
gold movements through the holding of foreign bills. 

4. Explain the use of the trade acceptance. 

5. Suggest a way for eliminating the national bank notes 
from circulation. 

6. In what way is the Federal Reserve Bank less efficient 
for clearing than the local clearing-house? 

7. Why should people want decentralization in bank- 
ing? 

8. Compare the assets of the Federal Reserve Bank of 
New York with those of the other banks. What per- 
centage of the total does the New York bank hold? 

9. What advantage would universal par check collec- 
tion be to the business man ? 

10. How much capital and surplus does a Federal Re- 
serve Bank need? 

11. Trace roughly the course of earnings of the Federal 
Reserve Banks and predict whether this year's earnings 
will be greater or less than last year's earnings. 

12. What services do the Federal Reserve Banks per- 
form for the government? 

13. Show that the present reserve holdings are safer 
than the holdings before the Federal Reserve Act although 
the percentage of reserves is less. 

14. Trace the security back of the Federal Reserve 
notes until you get to actual concrete wealth. 

15. Indicate the process by which Federal Reserve notes 
expand to meet the demands of business and contract 
when no longer needed. 

16. What item indicates the earnings of the banks? 



CHAPTER VT 
SOCIALISM 

1 . The Problrins of the Distribution of Wealth. 2. Utopian Socialism 
— Fourier— Owen. 3. The Theoretical Basis of .Socialism— Marx. 4. 
Socialist Criticism of the Present Order. 5. Consideration of the Criti- 
cism. 6. The Socialist Proposals. 7. The Socialist Party— Number 
of Voters — Platform. 8. (iuild Socialism. 9. Exercises. 

I. The Problems of the Distribution of Wealth. There 
are two problems in the distribution of wealth: (a) the de- 
termination of remuneration for services of the various 
factors in production, and (b) the determination of the 
amounts which dilTerent individuals in society get. In the 
case of many laborers, there is only one source, their 
wages. Some in(Hviduals receive wages, rent, interest, and 
l)rolits. Obviously, it is the second type of distribution 
which starts most of the discussions about the justice of 
the present order, but very soon the discussion gets back 
to the legitimacy of the shares of distribution in the first 
sense. The single-taxers attack the private receipt of land 
rent. The socialist would rule out all shares except wages. 

The labor movement has taken on different forms in 
different coimtries. In (ireat Britain and the United 
States, the trade union movement is the most important 
aspect of the effort of hdjorers tt) improve their condi- 
tions. Tliis movement is discussed in other chapters. On 
the continent of lOurope, although there are trade-unions, 
more emphasis has been given to socialism. Speaking 
broadly, we may say that the trade-unionist accepts the 
present economic order, and, working within that order, 

94 



Socialism, 95 

endeavors to improve his condition by getting shorter 
hours and higher wages. The socialist aims to improve 
his condition by changing the present economic order. 
There are different aspects of socialism. 

2. Utopian Socialism.^ — The early socialist movements 
were characterized by planning for ideal commonwealths 
or ideal organizations of society. These in general are 
called Utopias, from the name of the famous book by Sir 
Thomas More. 

The basis of most of these schemes was the idea of the 
natural rights of man and a total lack of the idea of his- 
torical continuity. These Utopian sociahsts thought that 
social institutions could be discarded and new ones created 
with the same ease with which a man can change his clothes. 

Each had an analysis of the evils of society and a plan 
to remedy them. Fourier may be taken as typical; he 
thought that not enough wealth was produced because 
many were not employed at "productive" labor. Soldiers, 
the idle rich, tramps, criminals, police and courts, lawyers, 
philosophers, tax officials made up about two-thirds of 
society and lived off the other third which really worked. 
Those who worked were not set to the task for which they 
were best fitted. The scale of production was often too 
small to get the best result. Middlemen exploited both 
the producer and consumer. 

Fourier's plan for the organization of society to get rid 
of the evils was to have a phalanx composed of about 
1,500 people. They were to have a considerable area of 
ground and be practically self-sufficing, devoting most of 
their time to agriculture with some attention to manufac- 
ture. They were all to live in one big building with great 
' Cf. Skelton, Socialism, chap. IV. 



96 Infroduciion fo Economic Problems 

comforts and luxuries made possible by uniting scattered 
households. We might call it the prototype of the mod- 
ern apartment-house if it were not for the fact that the 
workshops were in the same building. 

He had a novel scheme to get men to work. The desire 
for variety was to be catered to. Each man would work 
at six or eight different occupations each day. 

The scheme of the distribution of wealth was rather 
complicated. Every one was to receive a minimum of 
consumption goods. Each occupation gets a share, greater 
as it promotes harmony, and varying inversely with the 
amount of pleasure. The share of each occupation is 
divided into twelve parts, five going to labor, four to 
talent, and three to capital. Thus, he kept private prop- 
erty and capital. 

Robert Owen planned communities of from 500 to 3,000 
members. The whole world was eventually to be covered 
with these communities which would federate. In Owen's 
proposed communities, equality was to be the basis of the 
distribution of wealth. There was to be no private property. 

The Utopians believed in peaceful propaganda. They 
were sure that if their plan was tried its success would be 
such that all would be convinced. America was a favorite 
ground for experimentation because of the freedom and 
the cheap land. Hundreds of communities were started; 
most of them failed quickly. The only ones which were 
permanently successful were those where there was a re- 
ligious bond. Quite frequently the members were more 
interested in talk than in work. 

3. The Theoretical Basis of Socialism. — Karl Marx was 
a radical who took part in the German revolution of 1848 
and then went to England. In distinction to the socialism 



Socialism 97 

which preceded, Marx and his followers have called their 
socialism scientific. In the year 1848, Marx and Engels 
put forth the Communist Manifesto. The ideas expressed 
in this document may be taken as typical of what is called 
orthodox socialism. They claim that the prevailing mode 
of economic production and exchange determine the social 
organization of society and explain the political and in- 
tellectual history of the time. Marx followed the phi- 
losophy of Hegel, giving it a materialistic interpretation. 
All history, Marx and Engels say, has been a struggle be- 
tween classes. At the time when they were writing, the 
struggle, they said, was between the proletariat and bour- 
geoisie. Previously, when classes had emancipated them- 
selves, they proceeded to enslave the class below them. 
Marx said that with the victory of the proletariat, class 
struggle would cease since there was no class below it to 
enslave. The doctrines are developed at greater length in 
Marx's book Das Capital. In the first place the theory 
of value is that all value is based, or rather should be based, 
on the socially necessary labor time involved in production. 
This theory of value has been treated in Turner's Intro- 
duction, pages 470-471. 

The theory of value also contains the following corollary, 
called the theory of surplus value. In society as it is con- 
stituted under the capitalist system, Marx says that the 
laborer produces all the value, but that the capitalist, 
through his control of capital, is enabled to prevent the 
laborer from getting all that he produces. He takes the 
surplus above what is necessary to give the laborer an ex- 
istence. Here Marx is basing his theory on the iron law 
of wages in its baldest and crudest form in which no allow- 
ance was made for raising the standard of living. 



98 Introduction to Economic Problems 

Another theory has to do with what is called the doctrine 
of increasing misery. Historically, the analysis runs as 
follows: Under slavery the master was bound to furnish 
the slave land and equipment to work with as well as food 
and shelter. With the introduction of serfdom, the condi- 
tion, the socialists say, is worse because the laborer now 
has to provide his own food and clothing; the lord provides 
the land. The final degradation comes in what they call 
wage slavery, in which the employer is not bound to fur- 
nish food and clothing, land, nor employment. In its appli- 
cation to the capitalist system of production, the doctrine 
of increasing misery insists that as the capitalists use the 
surplus which goes to them to acquire more capital the 
laborers are exploited more and more until finally the sys- 
tem gets so bad that revolution is inevitable. 

One of the results of the Industrial Revolution was an 
increase in the size of the business unit. Business became 
more concentrated. One big factory replaced a number 
of small hand workshops. Marx observed this concen- 
tration and insisted that the tendency would continue until 
all industry was in the hands of a relatively small number 
of people. Then it would be easy for the state to take over 
industry. The period of trust formation appeared to some 
socialists to be a fulfilling of the prophecy of Marx. No 
one at the present time is quite so sure as Marx that the 
process will really continue until all industries are com- 
bined into one. Not all of the trusts have been successful. 
Concentration in agriculture has gone less far. In most 
countries, agricultural production is still in the hands of the 
small landholders. In many countries, the average size of 
farms is growing smaller rather than larger. 

Marx thought that the middle class would disappear, 



Socialism 99 

leaving only the workers and the capitalists. Most ob- 
servers of social conditions in various countries agree that 
the middle class, is increasing rather than decreasing. 

In the theory of increasing misery, Marx again was gen- 
eralizing on the basis of conditions in England and many 
facts seemed to support his contention. Very few statis- 
ticians now would be willing to admit that, taking the long- 
time view of things, misery has been increasing. All of the 
tests show that considering fairly long periods the laborer 
at the present time is better off than he was previously. 

The socialist doctrine of crises is a corollary of the doc- 
trine of surplus value. As the capitalist invests more and 
more capital, less and less of the proceeds of industry go 
to the workers. Thus, the workers are unable to buy the 
products of industry; and so recurring periods come, in 
which manufacturers are unable to sell their products. 
Presumably, the inevitable revolution will come in con- 
nection with a crisis. 

4. Socialist Criticism of the Present Order.^ — All but a 
few people admit that the present economic and social 
order is not perfect. Many people are not satisfied with 
the share of goods which they receive under the present 
distribution of wealth. To these people the socialist prop- 
aganda makes its appeal. It blames all of our miseries on 
the capitalistic system of production. Most of the propa- 
ganda is devoted to the denunciation of the present order 
with only a slight attention to anything but the broadest 
generalities about the order which it is proposed to sub- 
stitute for it. 

The socialists claim that the competitive system, moti- 
vated by the pursuit of profit, is not efficient. It wastes 
^ Cf. Skelton, Socialism, chap. II. 



100 Introduction to Economic Problems 

our forests. It leads to overproduction in some lines and 
the multiplication of middlemen. They contrast the num- 
ber of milkmen on a street with the single postman. They 
maintain that competitive advertising is a waste. Under 
caj)italism they say that production is without plan, the 
adjustment of supply to demand is never exact, and as a 
result we have crises at more or less regular intervals. 
Competition, the socialists claim, results in adulteration; 
in "cheap and nasty" goods. Financial fraud is also 
blamed on the capitalist system. 

A second part of the criticism has to do with the effect 
of capitalism on human life. They say it condemns most 
people to misery, a struggle to get enough for a decent 
existence. The capitalist, they say, controls all chances 
for work and the workman can never be sure of his means 
of livelihood. Thus, the workman has no real freedom. 
His work also, as the result of minute division of labor, 
is usually monotonous and gives no chance for the play of 
individual initiative. Hours arc long, accidents frequent, 
and many conditions inimical to health. The small wages 
make it impossible to provide good living conditions. On 
the moral side, socialists claim that the competitive system 
is responsible for intemperance and vice. 

5. Consideration of the Criticism.' — To start with, we 
must recognize that this criticism is part of the socialist 
propaganda. They wish a new social order, so they main- 
tain that the present order is as bad as possible. Many of 
the socialists are actuated by the highest motives. But 
they are not scientific in their study. In so far as they 
point to actually existing evils, they perform a useful ser- 
vice. Though even here, the exaggeration in which they 
1 Cf. Skelton, Socialism, chap. 111. 



Socialism 101 

indulge often causes some people to discount their state- 
ments too much. 

We object, then, not so much to the individual state- 
ments, though many of them can be easily challenged, but 
to the general impression they attempt to create by stress- 
ing all the bad features, by suppressing all of the good 
features, and by implying that certain scattered instances 
are typical of the whole. 

The efficiency of the capitalistic system is to be tested, 
first by the comparison with what preceded it. In spite 
of admitted defects it has given the material basis for a 
much higher average standard of comfort for a larger num- 
ber of people than was ever possible before. In the 
second place, the comparison must be between the results 
of the present system and the probable results of the pro- 
posed system, not merely the enthusiastic promises and 
prophecies. 

Our capitalistic system involves co-operation as well as 
competition and is not entirely selfish in business or in 
using the gains from business. The state without becom- 
ing socialistic can regulate and check tendencies which 
prove harmful. Forests can be conserved. There are 
obvious wastes in our present system of marketing, but 
most people prefer it to the governmental control during the 
war. Our modern crises are much less serious than the 
famines which preceded them. Adulteration is handled 
by law as are also the grosser forms of financial fraud. 

The condition of the workers pictured by the socialist 
does not seem to be true in this country, at least. Employ- 
ers are not all heartless. Most of them do have an in- 
terest in their workers and the state enforces certain mini- 
mum standards on those who do not. Labor-unions have 



102 Introduction to Economic Problems 

gained great power, and many an employer during the war 
would have been quite startled if told he was dealing with 
wage slaves. Granted that the labor is more monotonous, 
it is less exhausting and, more important, hours of labor 
have been shortened. Most of the more serious hazards 
of industry have been minimized by laws regarding sani- 
tation and safety, and those injured come under work- 
men's compensation laws. Our public-school system aims 
to give each child a certain equipment. A part, at least, 
of the troubles of the poor arise from foolish use of wages 
as well as from the smallness of the wage. Granted a cer- 
tain minimum of material means for the satisfying of de- 
sires, the moral development is largely a matter of the 
individual. 

6. The Socialist Proposals.— In brief, the socialists pro- 
pose that the means of production shall be owned and 
operated by society as a whole. Some of the later socialists 
have not insisted that all the means of production shall be 
so owned; for example, in many cases they are in favor of 
permitting the small holders of agricultural lands to con- 
tinue to hold and operate their farms. They in general, 
however, wish to do away with the shares in distribution 
which now go to the landholder and the capitalist. This 
follows, of course, from their theory of value. If labor is 
the only productive factor, then obviously the landowner 
and the capitalist have no right to receive any of the 
product of industry, and just as surely if the labor theory 
of value is not accurate then the socialist analysis fails. 

Many problems arise about details, and there is no uni- 
formity in answering them. Most socialists say that the 
state will be democratic. The earlier propaganda talked 
of expropriating the capitaUst, now many suggest com- 



Socialism 



103 



pensation. The direction of industry would probably be 
in some form of bureaucracy, which will determine what and 
how much will be produced. Money might be retained. 
The earlier socialists seemed to favor equality in the dis- 
tribution of goods, now efhciency is frequently suggested. 
There is difficulty about the introduction of improvements 
and indeed about maintaining the efficiency of the workers 
and the leaders. The control of population would also be 
a serious problem. 

7. The Socialist Party. — In the United States there have 
been many vicissitudes to socialism as a political party. 
Our chief interest is not in the political details of the party 
but in the strength they have shown and the principles 
they advocate. 

The following table indicates that we have little to fear 
from the national action of such a small minority: 

SOCIALIST VOTE FOR PRESIDENT 1 



Year 



Vote 



Per Cent of 
Total Vote 



Per Cent 
of Population 



1892. 
1896. 
1900. 
1904. 
1908. 
I912. 
1916. 
1920. 



21,164 
36,274 
127,553 
433,532 
434,618 
913,132 
604,759 

947,000 



.176 
.263 
•913 

3-2 

2.9 

6.2 

3-3 
3-6 



•03 

•05 

.168 

.526 

.489 

-983 

• 603 

.896 



' E. G. Riggs, Forum, vol. 66, p. 144. 

The socialist party platform, of course, like other plat- 
forms, has a good deal to say of the mistakes and weak- 
nesses of the competing parties. Our interest, however, 
is in the section which defines their policy in so far as it 
is social and industrial. 



104 Inh'()dN(iio)i to Fjconomic Problems 

"Social. — ^r. All business vitally essential for the existence 
and welfare of the people, such as railroads, express ser- 
vice, steamship lines, telegraphs, mines, oil-wells, power 
plants, elevators, packing-houses, cold-storage plants, and 
all industries operating on a national scale should be taken 
over by the nation. 

" 2. All publicly owned industries should be administered 
jointly by the government and re])rescntatives of the work- 
ers, not for revenue or prol'it, but with the sole object of 
securing just compensation and humane conditions of em- 
ployment to the workers and efiicient and reasonable ser- 
vice to the public. 

"3. All banks should be acquired by the government and 
incorporated in a unified public banking system. 

"4. 'J'hc business of insurance should be taken over by 
the government and should be extended to include insur- 
ance against accident, sickness, invalidity, old age, and un- 
employment, without contribution on the part of the worker. 

"5- Congress should enforce the provisions of the Four- 
teenth and Fifteenth Amendments, with reference to the 
negroes, and that effective federal legislation should be 
enacted to secure to the negroes full cWW, political, indus- 
trial, and educational rights. 

''Industrial. — -i. Congress should enact effective laws to 
abolish child labor, to fix minimum wages, based on an 
ascertained cost of a decent standard of life, to protect 
migratory and unemployed workers from oppression, to 
abolish detective and strike-breaking agencies, and to estab- 
lish a shorter work-day in keeping with increased indus- 
trial productivity. 

''Fiscal. — I. That all war debts and other debts of the 
federal goxernment must be immediatel}' paid off in full, 



Socialism 105 

the funds for such payment to be raised by means of a 
progressive property tax, whose burden should fall upon 
the rich and particularly upon great fortunes made during 
the war. 

"2. A standing progressive income and a graduated in- 
heritance tax should be levied to provide for all needs of 
the government, including the cost of its increasing social 
and industrial functions. 

"3. The unearned increment of land should be taxed, all 
land held out of use should be taxed at full rental value." 

8. Guild Socialism.— -A variant called guild socialism 
has recently come into considerable prominence in Eng- 
land. The industries are to be owned by the people as a 
whole but operated by the workers. Thus, industry would 
be carried on by numerous guilds. The state would keep 
the peace between the guilds. A start has been made in 
the building industry. A workers' guild has been taking 
contracts to build houses for municipalities. 

9. Exercises. — i. How do you explain the greater growth 
of the labor movement in the form of socialism on the 
continent than in Great Britain and the United States? 

2. To what causes do you attribute the failure of the 
communistic experiments ? 

3. In what sense is Marxian socialism scientific? 

4. What facts of social development can be satisfactorily 
explained by an economic interpretation of history? Are 
there any facts which cannot be so explained ? 

5. Are actual class struggles wholly economic? 

6. In what stage of economic development is the labor 
theory of value a fairly satisfactory explanation of values ? 

7. How far has concentration proceeded in iron and 
steel, farming, clothing, cotton manufacture, woollen man- 
ufacture, groceries, dry-goods, tobacco, railroads, and 
housing ? 



lOG Introduction to Economic Problems 

8. What is meant by the middle class? From the sta- 
tistics of the income tax estimate the size of the middle 
class in the United States. 

9. What are the criteria of progress? Apply them to 
test the doctrine of increasing misery. 

10. If we admit that the present order has its faults, 
must we become socialists? 

11. What is the difference between socialism and social 
reform ? 

12. What is the difference between socialism and gov- 
ernment ownership ? 

13. Under socialism: How would goods be exchanged? 
Who would decide what and how much goods would be 
produced? How would directors of industry be chosen? 
How would they be rewarded? How would capital be 
procured ? How would progress in techmc of industry be 
obtained? How would overpopulation be prevented? 
How would the individual's occupation be determined? 
What means would be employed to keep the individual at 
work? Would wages be based on equality, need, desire, 
or efficiency? 

14. Why do others besides socialists vote the socialist 
ticket ? 



CHAPTER VII 
LABOR ORGANIZATIONS 

I. The Wage Bargain — Labor the Long Factor — Labor the Short 
Factor. 2. The Aims of Trade-Unions — Higher Wages — Shorter 
Hours — Sanitation and Safety — Security and Continuity of Employ- 
ment — Share in the Control of Industry. 3. Types of Unions and 
Federations. 4. Collective Bargaining — Rochester Clothing Agree- 
ment. 5. Strikes as War. 6. The Boycott, the Union Label, and 
Other Activities. 7. The Open and Closed Shop Controversy. 8. 
Trade-Union Leadership. 9. Employers' Associations. 10. Arbitra- 
tion and Conciliation. 11. The Kansas Industrial Relations Court. 
12. Organized Labor and the War — War Labor Board. 13. Exercises. 

I. The Wage Bargain. — In the discussion of the theory 
of the distribution of wealth among the factors of produc- 
tion we talked a great deal about long and short factors of 
production and the small and large remunerations coming 
to them.^ The principle was laid down that "wages are 
the discounted marginal product of labor." Now we are 
to see how these principles are actually worked out under 
modern economic conditions. It is evident at once that 
there is nothing automatic about the process. At each 
step individual initiative comes into play. Work must be 
sought, wages must be agreed upon. Let us picture the 
wage bargain. 

The Wage Bargain Where Labor Is the Long Factor. — 
We will take first a case under the factory system. Sup- 
pose that Bill Jones is one of 5,000 employees at a 
plant. He is not satisfied with the wages he is getting. 
He decides to try for a raise. He may deal with the owner, 
but more probably it will be with a hired manager. As 
worker and manager get together the contest is seen to be 
^Turner's Introduction, chap. XX, 
107 



108 Introduction to Economic Problems 

very unequal. What does Bill mean to the manager? 
Nothing in particular; he knows that if Bill quits he can 
get another man to fill his place. What does the job mean 
to Bill? Food, clothes, and house for himself and family. 
If he loses his job, he may get another one after a while; 
but it may mean that he must move, and there is always 
the possibihty that he may not get another job. The 
powers of expression are vastly unequal. The manager is 
used to talking. Bill is not. The manager is well dressed, 
Bill feels that his cheaper clothes put him at a disadvan- 
tage. The result is usually that Bill makes an ineffective 
presentation of his demand and is curtly refused. He goes 
away with some resentment but also some relief that the 
matter is over with. 

The Wage Bargain Where Labor Is the Short Factor. — 
The war gave forceful illustration of a condition in which 
labor was the short factor. From the standpoint of the 
employer, labor became insolent in its demands. The 
former situation was reversed. The job meant little to the 
worker, for he knew that he could get another without any 
difficulty. The laborer meant much to the employer, be- 
cause the latter knew that he would have difficulty in re- 
placing the worker and that his production would be cut 
down and the chance for large profit be lost. 

Organization of laborers aims to strengthen their posi- 
tion in bargaining for a higher wage. It may increase 
wages in two ways: First, it sometimes happens that, 
where for want of free competition the employer may force 
an unfair bargain, a group of workers fails to receive "the 
discounted marginal product" of their labor. The union 
may help them to get that amount. Second, the union 
may exercise control over the amount of labor and thus 



Labor Organizations 109 

increase wages by making labor more of a short factor. 
The attempt here is to apply the well-known principles of 
monopoly price. Fortunately for society, the effort to 
create a labor monopoly is rarely successful. Craft skill 
cannot well be monopolized ; machines can usually be made 
to replace such laborers. 

2. The Aims of Trade-Unions. — In sum, the aims of 
trade-unions look toward the improvement of the condi- 
tions of workmen. More specifically, the workers want 
higher wages, shorter hours, better conditions of sanita- 
tion and safety, security and continuity of employment, 
as well as a share in the control of industry. These may 
be considered in turn. 

Higher Wages. — We saw above that there is a legitimate 
place for union activity in raising wages. Many of the 
workers do not understand the limitation on the amount 
to which wages can be raised. They see no reason why 
wages cannot go up indefinitely. They do not see that in- 
creases in wages will finally force an increase in prices, and 
the increase in prices will cause a decrease in the amount 
of the product which the public will buy. 

Shorter Hours. — The problem of hours of labor is one of 
the most important problems from the standpoint of both 
the public and the laborer. We recognize labor as a means 
rather than an end. In a democracy we wish each indi- 
vidual to live a well-rounded life. Labor provides the 
material means which make such a life possible. But if 
labor is too long continued, the laborer has no time or 
energy left to enjoy life. If labor is not continued long 
enough, the material means for civilization are lacking, 
and there is danger of reversion to idleness and low stand- 
ards of living. 



1 1 Introdtidion to Economic Problems 

Another serious aspect of the problem has to do with the 
relative hours worked by different classes of laborers. 
Wicksteed calls it the ''disease of civilization" that one 
group can benefit itself at the expense of other groups. 
We recognize that some kinds of work are more disagree- 
able, or tiring, than other kinds, and that a shortening of 
hours in certain lines of employment tends to equalize the 
difference in attractiveness. A decrease beyond this justi- 
fiable point in the hours might increase the remuneration 
of the group at the expense of all other workers who pur- 
chased the products of their labor. The shorter hours and 
higher wages would mean increased prices of the product 
of the group. 

Better Condition of Sanitation and Safety. — ^At the present 
time questions of sanitation and safety are usually handled 
through labor legislation, which must wait its turn for 
discussion. 

Security and Continuity of Employment. — The laborer's 
job, as we saw above, means life or death to him. He may 
lose the job by being fired or by stoppage of work due to 
depression. Much of the trouble in industry arises from 
the loss of personal contact which has come with the 
growth in size of business establishments. Often the hiring 
and firing are done by foremen, many of whom illustrate 
the danger of giving one man absolute authority over other 
men. The foreman may fire a man from petty spite or 
because he fears that the man is better than he is and may, 
in time, supplant him. The worker wishes to be free from 
the feeling that he holds his place subject to the whim of 
a foreman. Then again, promotions and lay-ofifs may be 
determined by favoritism. The unions often insist on seni- 
ority. This is particularly true of the strong railway 



Labor Organizations 111 

brotherhoods. Thus, continuity is secured for the older 
men, but it is obtained at the expense of the younger men. 
Promotion by seniority is objectionable because it removes 
the incentive to become efficient in order to win promo- 
tion. However, promotion by favoritism leads to syco- 
phancy rather than efficiency. In the United States army 
and navy, the seniority system for promotion is ordinarily 
used to prevent political manipulation and favoritism. 

A Share in the Control of Industry. — Much is heard now- 
adays of "democracy in industry." Using the political 
analogy, workers complain that industry is organized on 
an autocratic basis. They demand that they shall be con- 
sulted about wages and hours of labor. Other control 
sought has ordinarily been in the matter of hiring and dis- 
charge. Sometimes an attempt is made to control or pre- 
vent the introduction of new processes or machinery. 

3. Types of Unions and Federations. — Unions may be 
classified in many different ways. On the basis of character 
of membership we may distinguish (i) the labor-union, (2) 
the trade or craft union, and (3) the industrial union. The 
labor-union may be composed of workers of all kinds; for 
example, a union made up of teamsters and tanners and 
painters and plumbers. Presumably, the purpose of the 
labor-union is to promote the welfare of the whole laboring 
class. The Knights of Labor founded in 1869 in Phila- 
delphia was a union of this type. 

The trade or craft union is the commonest type at present. 
It combines the workers of one craft, such as carpenters, 
and has the narrower, more selfish object of furthering the 
interests of that one craft instead of all labor. On the whole, 
the results have justified this narrowing of purpose. The 
industrial union, as its name indicates, takes the industry 



112 Introduction to Economic Problems 

instead of the craft as the basis of organization. Tlius, the 
United Mine Workers wish to have all of the men who work 
about the mines belong to the one union, instead of having 
the men belong to a great number of craft unions. The 
ability to shut down the mines completely gives them great 
bargaining power. 

Forms of Organization and Federation. — The typical craft 
or trade union is usually called an international. There 
may be locals in Canada, Cuba, or Mexico. In theory, the 
international gets its power from the locals. But prac- 
tically, through its control of the funds and its power to 
grant and revoke charters, the international really controls 
the locals. Sometimes there are subordinate organizations 
in each place of work. In the typographical union these 
are called chapels. The railway brotherhoods have com- 
binations of all the locals on one railway system. There 
are various levels of federations of unions; the basis is 
roughly territorial. At the top we have the American 
Federation of Labor. As its name implies, it is a federa- 
tion rather than an organic union. It combines most of 
the strong craft unions, except the railway brotherhoods, 
and also has as members some industrial unions. It aims 
to promote the interests of its members primarily through 
legislation and propaganda. It helps to organize unions. 
It keeps the peace between rival unions which claim juris- 
diction over certain processes. In each state there is a 
State Federation of Labor which looks after state legisla- 
tion and the promotion of the common interest of the 
labor-unions. In a number of cities there are city federa- 
tions. They assist in strikes and boycotts, see that the 
union label is used on all public printing, and see that union 
hours and wages are observed on all public work. 



Labor Organizations 113 

Besides these federations, there are other groupings. 
Thus, locally there will be an Allied Printing Trades Coun- 
cil. This combines all of the craft unions in the printing 
business and enables the workers to present a united front 
to the employers. In the building trades we find local, 
state, and national federations of the various craft unions. 

The methods used by trade-unions include collective bar- 
gaining, the strike, the boycott, and the union label. 

4. Collective Bargaining. — By collective bargaining we 
mean the setting of wages and the conditions of employ- 
ment by a process of negotiation between representatives 
of the employers and representatives of the workers. It 
equalizes more or less completely the strength of bargain- 
ing of the two parties. The workers' representative is 
often skilled in this industrial diplomacy. The employers 
face not the loss of one man's labor, but complete stop- 
page of work and consequent loss of profit. The employ- 
ers still have the advantage in the matter of staying power. 
Ordinarily they are in no danger of not having enough to 
eat, even if work should shut down for a long time. Usually 
the agreement is a matter of compromise. Each side asks 
for more than it expects to get, and gets about what it 
expected. The agreement is embodied in a contract which 
usually runs one or two years. Where both sides are well 
organized this method has often worked out satisfactorily. 

Collective bargaining usually proceeds on the basis of 
an agreement which provides the machinery and lays down 
the principles which govern the negotiations. The follow- 
ing is an example of a particularly successful agreement: 

Labor Agreement, Men's Clothing Industry, Rochester, New 
York. — I. This agreement made between the members of 
the Clothiers' Exchange of Rochester, New York, as in- 



114 Introduction to Economic Problems 

dividuals acting through the said exchange as their rep- 
resentative, and the Amalgamated Clothing Workers of 
America, shall become effective after ratification by the 
members of both parties, and the fact of such ratification 
shall be indicated by an exchange of notes between the 
president of the exchange and the president of the amal- 
gamated. The agreement shall continue in force until 
May 31, 1922. 

Handling of Grievances. — 2. The right of the workers in 
the industry to bargain collectively is agreed to, and the 
Amalgamated Clothing Workers of America is recognized 
as the organization of the workers, duly authorized to act 
as the agency for collective dealing with the employers. 
The employees in every shop shall elect representatives to 
take up their cases with the management in the first in- 
stance. If the shop representatives cannot agree with the 
management, then a union representative shall be called 
in. The employers shall appoint duly authorized represen- 
tatives of the management, who shall be responsible for 
carrying into effect the terms and conditions of this agree- 
ment in all their shops. 

Power of Hiring. — 3. The power to hire shall remain 
with the employer, but in cases where discrimination on 
account of union membership is charged, the impartial 
chairman shall have the right of review; and if facts are 
brought before the impartial chairman that appear to in- 
dicate that the labor policy of any house is calculated to 
undermine the union, he shall have the power to review 
that policy. 

Power of Discharging. — 4. The power to discharge and 
suspend employees remains with the employer, but it is 
agreed that this power will be exercised with justice and 



Labor Organizatiojis 115 

due regard for the rights of the workers; and if any worker 
feels that he has been unjustly treated in the exercise of 
this power, he may appeal to the labor adjustment board 
hereinafter mentioned, which shall have the power of re- 
view in all such cases. 

Changes in Shop Management. — 5. The right of the em- 
ployer to make changes in shop management and methods 
of manufacturing is recognized, such changes to be made 
without loss to the employees directly affected. 

No Strikes or Lockouts. — 6. There shall be no strikes, 
lockouts, or stoppages of work in any shop covered by this 
agreement. 

Equal Division of Work. — 7. The principle of equal divi- 
sion of work is recognized, and during slack seasons work 
shall be divided as far as practicable among all the workers 
in the shop. 

Labor Adjustment Board. — 8. The administration of this 
agreement is vested in a labor adjustment board, consist- 
ing of representatives of the employers and of representa- 
tives of the workmen, together with an impartial chairman 
selected by both parties. The representatives of the em- 
ployers and the representatives of the workmen upon this 
board shall have an equal vote, regardless of the number 
of representatives of either side, and in case of a tie vote 
the impartial chairman shall cast the decisive vote. All 
disputes or differences over questions arising under this 
agreement which the parties hereto are unable to adjust 
between themselves shall be referred to the labor adjust- 
ment board for adjustment or arbitration. This board 
shall have full and final jurisdiction over all such questions, 
and its decisions shall be conclusive, except as may be 
otherwise provided by agreement of the parties hereto. 



116 Introduction to Economic Problems 

Except where the board itself shall otherwise determine, 
the chairman of the board shall be authorized to take 
original jurisdiction of all cases and controversies arising 
under this agreement and to adjust or decide them in 
accordance with rules of practice and procedure estab- 
lished by the board. Decisions of the chairman shall be 
binding on both parties. It is agreed that William M. 
Leiserson shall continue to act as chairman of the labor 
adjustment board. 

9. The board shall have authority to make such rules, 
regulations, and supplementary arrangements not incon- 
sistent with this agreement as may be necessary to carry 
into effect the principles of this agreement or to apply 
these principles to new questions whenever they arise. It 
may also define, describe, and limit the penalties to be 
imposed for the violation of any of the provisions of this 
agreement. 

ID. The expenses of the labor adjustment board shall 
be borne equally by both parties to this agreement. 

Changes in Wage Scales. — 11. Upon the petition of either 
party the labor adjustment board shall have the power to 
determine whether important changes have taken place 
within the clothing industry, or in industrial conditions 
generally, which warrant changes in general wage levels 
or in hours of work; and if it is decided that such changes 
are warranted, negotiations shall begin between the parties 
hereto. In the event of a disagreement, the question shall 
be submitted to arbitration. 

12. Upon the petition of either party, any adjustment 
of wages of individuals or sections that may be necessary 
in order to remove serious and unjust inequalities in pay 
may be made at any time during the life of this agreement, 



Labor Organizations 117 

provided that no request for such adjustment shall be heard 
by the impartial chairman until he has been authorized to 
consider it by the labor adjustment board. A decision by 
the impartial chairman in such a matter shall take effect 
and operate during and after the first full work week after 
the date of the decision unless the parties otherwise agree. 

Minimum Wage. — 13. A minimum wage for all begin- 
ners in the industry and a probationary period during 
which the employer shall be free to discharge such help 
without question shall be fixed by the labor adjustment 
board. 

Regular Working Hours. — 14. The regular hours of work 
shall be forty-four per week, to be worked eight hours on 
the five days preceding Saturday and four hours on Satur- 
day. 

Payment for Overtime. — 15. For work done in excess of 
the regular number of hours per day, overtime shall be paid 
at the rate of time and one-half. 

Sanitary Control. — ^16. The labor adjustment board is 
authorized to exercise sanitary control over shops covered 
by this agreement, and it shall have authority to make 
regulations designed to protect the health and safety of 
the workers in the shops. 

Abolition of Home Work. — -17. It is agreed that home 
work shall be abolished and the labor adjustment board 
shall investigate and work out procedure to this end. 

5. Strikes as War.- — If collective bargaining is industrial 
diplomacy, then, in a very real sense, strikes are industrial 
war. Methods of reason and persuasion are abandoned 
for the appeal to force. The problem of the leaders of the 
men is to arouse in them a determination to win the strike 
which will not be shaken by short rations, lack of fuel, and 



118 Introduction to Economic Problems 

severe hardships. The leaders fill the minds of the men 
with a grim purpose to achieve certain demands. The de- 
mands are often much greater than the leaders have any 
hope of getting and are knowingly made so for the purpose 
of bargaining. The idea is to get what you want after the 
inevitable compromise has been made. The men are filled 
with propaganda to arouse a feeling of hatred and ill will 
against the employer. When the settlement has been 
made, there remain as a result of the struggle hostility and 
lack of confidence between employers and workers. 

In the strike the workers leave their jobs and resist any 
efforts of the employers to fill them. The success of the 
strike depends upon their ability to tie up the industry. 
The employer, of course, tries to start up with other work- 
ers. These are called "scabs " or "blacklegs." The worker 
looks on the scab as a traitor to the working class. For 
the sake of the high wages offered, the scab betrays his 
fellow workers and helps the employer force them to work 
under conditions they do not think fair. 

Picketing. — The strikers resort to picketing. The line 
between peaceful picketing, which is allowable, and picket- 
ing which is not peaceful is difficult to draw. Some judges 
are inclined to think that no picketing can be peaceful. 
In most cases persuasion is allowed. The strikers some- 
times resort to violence. Frequently the strikers say that 
the employers order the violence or destruction of property 
in order to alienate public sympathy. Street-car strikes 
in particular are characterized by violence, because of the 
necessity of wide distribution of the men. Perhaps an 
analogy may be drawn between violence in strikes and slug- 
ging in football. Both are condemned by right-thinking 
people. But in both cases the activity appears more hei- 



Labor Organizations 119 

nous when done by an opponent. The strike may be won 
or lost, or it may be settled by arbitration, which will be 
considered later. 

6. The Boycott, the Union Label, and Other Activities. — 
The boycott is the refusal to patronize and the attempt to 
keep others from patronizing one with whom the labor or- 
ganization has a disagreement. The effectiveness depends 
upon how serious an inroad is made upon the business con- 
cerned. A boycott would probably be more effective 
against the New York American than the New York Times 
because more unionists read the former paper. Secondary 
boycotts carry the thing one step further. An attempt is 
made to boycott all who trade with the boycotted person. 
The courts ordinarily hold this secondary boycott to be 
unlawful. 

The Union Label. — The idea here is that by means of the 
label every one may know that the article has been pro- 
duced under union conditions. The unions urge that all 
persons should buy only union-label goods. Thus, pressure 
is put upon firms to unionize their plants as a condition of 
being able to sell their product. 

Other Activities of Unions. — The unions carry on certain 
social and insurance activities. The unions hold "grand 
balls," picnics, and other social affairs. The unions collect 
dues from their members. Part of the dues go to the pay- 
ment of the officers, the balance goes for various benefits. 
The principal benefit is the payment received while out on 
strike. By means of the strike benefit the unions attempt 
to enable the strikers to hold out as long as is necessary to 
win the strike. Many of the unions have a small funeral 
benefit. The Brotherhoods of Locomotive Engineers and 
Locomotive Firemen have substantial life-insurance bene- 



120 Introdnction to Economic Problems 

fits. Usually the unions have a small out-of-work benefit. 
Some of the unions have a sickness benefit. A few provide 
for superannuated members. 

7. The Open and Closed Shop Controversy. — The dis- 
putants do not always use the open and closed shop with 
the same significance. Perhaps the best contrast is ob- 
tained if we define the closed shop as one in which all of 
the men employed belong to the union and union member- 
ship is required for employment; and the open shop as a 
non-union shop where union membership is a bar to em- 
ployment. 

The argument for the closed shop runs as follows : Labor 
organizations are needed because of the inequality of the 
bargaining power of the employers and workers. To make 
the unions effective they must have control of all of the 
workers, and they cannot have this control if men not 
members of the union can get employment. 

The open-shop argument is composed of two parts. One 
is a general attack on trade-unions and all of their works; 
and the second is the assertion of the natural right of the 
worker to work when and where and under what condi- 
tions he pleases, and the correlative right of the employer 
to hire and fire as he pleases. 

No general judgment is possible. If the union is decent, 
that is, if it is not monopolistic and does not prevent quali- 
fied men from joining and does not try to abuse its power, 
then probably the closed shop is preferable. 

8. Trade-Union Leadership. — The problem of leader- 
ship for trade-unions in the United States has been made 
more difficult by the opportunities for advancement open 
to the laborers. Mr. Charles M. Schwab is a born leader, 
but instead of staying in the laboring class and leading 



Labor Organizations 121 

them he became an entrepreneur. We expect to find all 
sorts of leaders of trade-unions just as we find all sorts of 
men in other positions. There is the grafter type. Robert 
P. Brindell built up a Building Trades Council in New York 
City and used it as a method of holding up contractors 
and builders. Unless they paid him bribes, he would call 
strikes and hamper the building projects. 

Andrew J. Fureuseth, of the International Seamen's 
Union, is of a different type. He impresses people as being 
absolutely sincere and self-sacrificing in his efforts to im- 
prove the conditions of seamen. He is one of the best- 
informed men in the country on maritime law. 

There is danger that the leaders may come to think 
that the movement exists only for the purpose of provid- 
ing salaries for themselves. Members may be considered 
mere dues payers. The officers may become strongly in- 
trenched in their positions; and, by manipulation, they 
may be able to resist any attempt to remove them from 
their posts. 

Just as it is dangerous to generalize on the basis of 
political constitutions and laws, so it is not safe to follow 
union constitutions without checking up the working in 
actual practice. For example, the walking delegate or 
business agent, who is supposed to see that the union 
rules are observed, according to most constitutions has little 
power; he acts only with the authorization of the union. 
In practice, however, the walking delegate, in times of 
difficulty, is frequently given almost autocratic power. 

9. Employers' Associations. — Naturally, the organiza- 
tion of the workers has been met by organization of the 
employers. They have developed methods for combat- 
ing the methods used by the workers' organizations. 



122 Introduction to Economic Problems 

The lockout is the analogue of the strike. The employers 
refuse to give employment to the workers unless they 
agree to certain conditions. It brings the same test of 
staying power, and, of course, may catch the workers un- 
prepared. The hlack list is a reply to the boycott. The 
black list is illegal, but no difficulty has been experienced in 
devising methods which are legal though they amount to 
a black list. Thus, some employers' associations maintain 
an employment bureau. In this bureau are kept records 
of all the men who work or have worked in the industry. 
When a man is discharged from a plant, the reason is indi- 
cated on the card. A man who has tried to promote a 
union would probably be reported as a "trouble-maker" 
or "agitator," and would be refused employment in the 
establishment of the other members of the association. 

Types of Employers^ Associations. — The militant type are 
anti-union: They refuse to deal with the unions and at- 
tempt to destroy them. The National Metal Trades 
Association is of this type. Some associations deal col- 
lectively with their workers. They are the counterparts 
of the national trade-unions. The Stove Founders' 
Association is of this type. 

ID. Arbitration and Conciliation. — The methods of arbi- 
tration and conciliation are proposed to lessen strife in in- 
dustry. Conciliation consists in efforts of outsiders to 
bring the disputants together. Arbitration is the settle- 
ment of the dispute by reference to one or more persons, 
all or some of whom are supposedly impartial. Not infre- 
quently arbitration takes place after a strike has been in 
progress some time; occasionally it is used to avert the 
strike. It is frequently the weaker side which proposes 
arbitration. They wish to gi^'e the public the impression 



Labor Organizations 123 

that they are so confident of the justice of their case that 
they are wiUing to have impartial persons decide. As a 
matter of fact, they fear that if the strike goes on they will 
lose, and they figure that in the inevitable compromise 
decision of arbitration they will get at least a little. 

Compulsory Arbitration. — In Australia and New Zealand 
there have been developed systems of compulsory arbitra- 
tion, the essential feature of which is the setting of wages 
by public authority. This was hailed by some as the 
ultimate solution of the labor problem, and New Zealand 
was called "a land without strikes." This designation has 
not proved accurate, for strikes have occurred. And what 
is more, the penalties for unauthorized striking have not 
been enforced. 

Organized labor in the United States is almost a unit in 
opposing compulsory arbitration. Labor organizations 
fear that any tribunal would be prejudiced against them, 
and they assert that compelling workers to labor under 
undesirable conditions is involuntary servitude. 

The fundamental difficulty about arbitration is that there 
is no standard of fair wages which both sides accept as 
final. 

II. The Kansas Industrial Relations Court. — Although 
this is called a court, it might better be termed a commis- 
sion, since its decisions are not enforced in the ordinary 
way but are enforced by appealing to the regular courts. 
The law arose out of the difficulties occasioned by a coal 
strike in 1919. It represents the idea that consumers have 
a right to demand that employers and workers shall not 
cause consumers distress because they cannot agree on 
wages or conditions of employment. The law provides for 
''a court of industrial relations," made up of three "judges" 



124 rntrodvciion to Economic Problems 

appointed by the governor of the state for a three-year 
term. The court has jurisdiction in those industries which 
are connected with pubHc interest. It may intervene in 
any industrial dispute in these industries on its own initia- 
tive, by the request of cither party to the dispute, a com- 
plaint of ten citizens, or a complaint of the attorney- 
general of the state. The procedure of the court requires 
that the rules of evidence as recognized by the Supreme 
Court of the state are to be followed in investigation. 
The law lays down the principle to guide the court that 
labor is entitled to a "fair" wage and capital to a "fair" 
return. The difficulty involved in this compulsory deter- 
mination of wage rates is the enforcing of the decision. 

12. Organized Labor and the War. — During the war, 
organized labor was in a very strategic position. The 
labor leaders on the whole aided in the plans of the govern- 
ment for industrial mobilization. At the same time they 
were anxious to take advantage of their position to advance 
the interests of organized labor. Many of the strikes which 
occurred were not authorized by the higher union officials. 

The great advance obtained was the practical recogni- 
tion of the unions by the government. They were given 
representation on the commission which drew up the plan 
for the War Labor Board. This board was composed of 
five representatives of the employers, five representatives 
chosen by the American Federation of Labor, and two 
chairmen selected by the two groups. The two chairmen 
took turns in presiding. The aims of the board were to 
speed production and prevent cessation of work. The 
first idea was that the status quo with respect to labor 
organization should be maintained. Later, however, the 
unions were permitted to make gains. 



Labor Organizations 125 

The following principles were adopted as the basis of 
the activity of the board: 

Principles and Policies to Govern Relations Between 

Workers and Employers in War Industries 

FOR THE Duration of the War 

There should be no strikes or lockouts during the war. 

Right to Organize. — i. The right of workers to organize 
in trade-unions and to bargain collectively, through chosen 
representatives, is recognized and affirmed. This right 
shall not be denied, abridged, or interfered with by the 
employers in any manner whatsoever. 

2. The right of employers to organize in associations or 
groups and to bargain collectively, through chosen rep- 
resentatives, is recognized and affirmed. This right shall 
not be denied, abridged, or interfered with by the workers 
in any manner whatsoever. 

3. Employers should not discharge workers for member- 
ship in trade-unions, nor for legitimate trade-union ac- 
tivities. 

4. The workers, in the exercise of their right to organize, 
shall not use coercive measures of any kind to induce per- 
sons to join their organizations, nor to induce employers 
to bargain or deal therewith. 

Existing Conditions. — i. In establishments where the 
union shop exists the same shall continue and the union 
standards as to wages, hours of labor, and other conditions 
of employment shall be maintained. 

2. In establishments where union and non-union men 
and women now work together, and the employer meets 
only with employees or representatives engaged in said 
establishments, the continuance of such condition shall not 



126 Introduction to Economic Problems 

be deemed a grievance. This declaration, however, is not 
intended in any manner to deny the right, or discourage 
the practice, of the formation of labor-unions, or the join- 
ing of the same by the workers in said establishments, as 
guaranteed in the last paragraph, nor to prevent the War 
Labor Board from urging, or any umpire from granting, 
under the machinery herein provided, improvement of 
their situation in the matter of wages, hours of labor, or 
other conditions, as shall be found desirable from time to 
time. 

3. Established safeguards and regulations for the pro- 
tection of the health and safety of workers shall not be 
relaxed. 

Women in Industry. — If it shall become necessary to 
employ women on work ordinarily performed by men, 
they must be allowed equal pay for equal work and must 
not be allotted tasks disproportionate to their strength. 

Hours of Labor. — The basic eight-hour day is recognized 
as applying in all cases in which existing law requires it. 
In all other cases the question of hours of labor shall be 
settled with due regard to governmental necessities and 
the welfare, health, and proper comfort of the workers^ 

Maximum Production. — The maximum production of all 
war industries should be maintained and methods of work 
and operation on the part of employers or workers which 
operate to delay or limit production, or which have a ten- 
dency to increase artificially the cost thereof, should be 
discouraged. 

Mobilization of Labor. — For the purpose of mobilizing 
the labor supply with a view to its rapid and effective dis- 
tribution, a permanent list of the number of skilled and 
other workers available in different parts of the nation 



Labor Organizations 127 

shall be kept on file by the Department of Labor, the in- 
formation to be constantly furnished (i) by trade-unions; 
(2) by state employment bureaus and federal agencies of 
like character; (3) by the managers and operators of in- 
dustrial establishments throughout the country. These 
agencies should be given opportunity to aid in the dis- 
tribution of labor, as necessity demands. 

Custom of Localities. — In fixing wages, hours, and condi- 
tions of labor regard should always be had to the labor 
standards, wage scales, and other conditions prevailing in 
the localities affected. 

The Living Wage. — (i) The right of all workers, includ- 
ing common laborers, to a living wage is hereby declared. 

(2) In fixing wages, minimum rates of pay shall be estab- 
lished which will insure the subsistence of the worker and 
his family in health and reasonable comfort. 

13. Exercises. — i. Why is there more dispute about 
wages than about the other shares in distribution? 

2. List the advantages and disadvantages in bargaining 
of each of the parties to the wage bargain. 

3. What sets the limit to the possibility of increase in 
wages by union activity? 

4. Draw up a list of the grievances of labor. Which can 
be remedied by union activity? 

5. How do unions affect the efficiency of their members? 
Explain carefully. 

6. What are the difficulties in organizing unions among 
farm laborers? women? casual workers? 

7. What is the economic basis for the area covered by 
the different federations of unions? 

8. Why is it difficult for employers and workers to agree 
on a just basis for the determination of wages ? 

9. Should workers be permitted to bargain through out- 
side agents ? 



1^28 IiHrodnction to Economic Problems 

10. Outline the strategy you would use to get an increase 
in wages through collective bargaining. 

11. What rights has the public in the case of a strike? 

12. Which is the better analogy, the strike as war, or the 
strike as a game? 

13. If you were a labor leader, how would you go about 
winning a street-car strike? 

14. If you were a clothing manufacturer, how would you 
go about breaking a strike of your employees? 

15. What industries have you seen boycotted? How 
effective was the boycott? 

16. In what lines of goods is the union label used on the 
best qualities? on the cheaper grades? 

17. Does the union label add to the price of the goods? 

18. Why are there grafters among labor leaders? Who 
is to blame? 

19. What rewards has the honest labor leader? 

20. Which are easier to organize, the workers or the 
employers ? 

21. Which would you expect to win in a contest between 
workers and employers, if: 

[a] both are unorganized? 

{b) the laborers are organized and the employers un- 
organized ? 

((■) both are organized locally? 

(//) the laborers are organized nationally and the em- 
ployers locally? 

{e) the laborers are organized locally and the employers 
nationally ? 

(/) both are organized nationally? 

22. Indicate the methods developed by the employers' 
associations to meet the methods of the labor-unions. 



CHAPTER VIII 

LEGAL REGULATION OF THE CONDITIONS 
OF EMPLOYMENT 

I. The Reasons for Regulation. 2. Sanitation. 3. The Regulation 
of the Labor of Children — Hours — Age. 4. The Regulation of the 
Employment of Women— Hours — Night-Work — Prohibited Employ- 
ments. 5. The Minimum Wage for Women and Children. 6. The 
Regulation of the Conditions of Employment of Men— Hours. 7. 
Exercises. 

There are two classes of labor legislation: regulations of 
the conditions of labor, and social insurance. The first 
type will be discussed in this chapter, and the social in- 
surance will be taken up in a later chapter. 

1. The Reasons for Regulation. — The basis of this regu- 
lation is the experience that the individual workers are 
unable under the present complex organization of industry 
to enforce demands for improvement of conditions. The 
workers deal primarily with foremen or bosses, and the re- 
sult of insistence on improved conditions would ordinarily 
be the loss of their positions. So, in order to protect the 
workers and indeed to protect the high-minded employers 
from the unfair competition indulged in by the less high- 
minded, the state finds it necessary to step in to set cer- 
tain levels of competition with reference to the conditions 
of workshops. 

2. Sanitation and Safety. — The ideal here is that the 
conditions in the workshops shall be such that the workers' 
health and efficiency shall not be impaired by working in 
them. Many employers have discovered that money spent 
in improving the working conditions repays itself in in- 

129 



130 Introduction to Economic Problems 

creased output, but some employers have not discovered 
this and so the law must be used to enforce certain min- 
imum standards. Proper light and heat and ventilation, 
of course, are necessary for efficiency. In occupations 
where the process involves the collection of dust, it is neces- 
sary to provide for the removal of this dust. Thus, in 
grinding and polishing metals, provisions can be made for 
the removal of the dust by suction to prevent the worker 
from inhaling it. 

Safety Devices. — Great advances have been made re- 
cently in the development of safety devices. The hazards 
of industry have been brought to the attention of the people 
by the records of the accidents which have been kept as 
the result of the development of workers' compensation 
laws, which will be treated later. Many of the accidents 
were found to be preventable by putting guards on belts 
and putting coverings around the gears. 

The great advance in methods of providing for sanita- 
tion and safety and the lack of technical knowledge on the 
part of the legislators make it inadvisable to attempt to 
make minute requirements in the law. The better way 
involves a law which lays down the general principles 
and provides for some sort of administrative board 
to make particular rulings from time to time. Thus, the 
New York law states the principle and the method of 
application : 

"All factories, factory buildings, mercantile establish- 
ments and other places to which this chapter is applicable, 
shall be so constructed, equipped, arranged, operated and 
conducted in all respects as to provide reasonable and ade- 
quate protection to the lives, health and safety of all per- 
sons employed therein. The industrial board shall, from 



Legal Regulation of Employment 131 

time to time, make such rules and regulations as will carry 
into effect the provisions of this section." 

3. The Regulation of the Labor of Children. — Regulation 
of Hours. — In 1920, twenty-six states and the federal law 
provided that eight hours should be the maximum work 
for children. Often the laws except domestic service and 
work in agriculture. Sometimes they exclude canneries 
and stores. The fight against state legislation has often 
been cleverly carried on by playing off one state against 
another. That is, the employers in one state complain 
that it is not fair to subject them to stricter regulations 
concerning the use of child labor than those which apply 
to their competitors in other states. There is no doubt 
about the question of the constitutionaKty of such laws. 
About forty states prohibit night-work of children under 
sixteen. Usually the laws forbid working between the 
hours of 7 p. M. and 6 a. m. The exclusion of children is 
on the basis that working might cause injury to life, limb, 
health, or morals. The question of constitutionality has 
been raised in connection with the federal law. In 191 6, 
a law was passed regulating the working of children by 
excluding from interstate commerce products upon which 
they had worked in violation of the law. This law was 
declared unconstitutional on the ground that the control 
of Congress over interstate commerce did not extend to 
the manufacturing of products for interstate commerce. 
In 191 9, a second attempt was made to enforce certain 
standards, such as: no work under the age of fourteen; in 
the ages of fourteen to sixteen work should be limited to 
eight hours a day and forty-eight hours a week with no 
night- work; no child labor in mines under sixteen. This 
law was passed under the federal power of taxation. The 



132 Introduction to Economic Problems 

proposers of the law hoped to control child labor by making 
it unprofitable for manufacturers to use child labor. It 
provided for a tax of lo per cent on all goods produced in 
violation of the law. The constitutionality of this law has 
been questioned. 

Regulations with Respect to Age of Children. — Most of the 
state laws provide that no child under fourteen shall be 
allowed to work in any gainful occupation. Some states 
provide that no child under sixteen shall work in certain 
hazardous occupations, and that no child under eighteen 
shall work in extrahazardous occupations. The child of 
the poor widow is sometimes exempted from the applica- 
tion of the law. This exemption seems to be very illogical. 
The whole purpose of the legislation is to guarantee to 
every child the chance to develop into a normal useful 
citizen. The accident of having a poor widow for a mother 
should not deprive the child of his birthright. The occu- 
pations which are frequently counted as hazardous are 
cleaning and oiling machines; working with machine-saws; 
stamping, grinding, and mixing machines; working with 
dusts and poisonous acids. The extrahazardous occupa- 
tions frequently include mines, blast-furnaces, railroads, 
and explosives. In New York the age for night messengers 
is set at twenty-one, on the ground that the work is danger- 
ous to morals. Frequently, there is less legislation about 
the street trades. Often newsboys start at twelve years 
of age, and peddling may often be done at fourteen. Those 
who are interested in the promotion of child-labor legisla- 
tion wish to raise these standards and to make the limit 
fourteen years in the case of boys and sixteen for girls, in 
order to assure better physical development and more 
education. Some states require a physical examination 



Legal Regulation of Employvient 133 

on the ground that it seems logical to determine that the 
child is physically able for the work which it wishes to do. 
The medical records in the schools would help. Not only 
should there be a physical examination before the child 
starts to work, but there should be subsequent examina- 
tions to make sure that the work is not proving injurious. 
It is obvious that the purpose of child-labor legislation 
must cause a tying up of the educational requirements 
with the requirements concerning the age at which the 
child may go to work. About one-half of the states re- 
quire by law the completion of at least eight grades, but 
the enforcement is often lax. It is sometimes difficult to 
establish with certainty the age of a child, particularly if 
the child itself and the parents are anxious to violate the 
law. The birth certificate, baptismal records, school rec- 
ords, all, may be used. Some of the states which have de- 
veloped the legislation have a system of work certificates. 
The work certificate is usually issued by some one con- 
nected with the school system. It is sent from the school 
authorities to the employer; and when the child stops work 
it is to be returned to the school authorities. 

In New York State, the law provides for work certificates 
issued by the Department of Health, or health commis- 
sioner, or some one designated by them. Medical inspec- 
tors may order a physical examination of children between 
the ages of fourteen and sixteen who work in factories or 
mercantile establishments. If the child is found to be 
physically unfit to be employed, the employment certificate 
is cancelled. Then the child cannot work until the age 
of sixteen is reached, or until a new examination shows 
that the infirmities have been removed. Children are not 
allowed to work more than eight hours in any one day or 



134 Introduction to Economic Problems 

more than forty-eight in one week. Boys twelve to four- 
teen years old may sell papers after 6 a. m. and before 8 
p. M. if they get a permit at the request of their parent 
or guardian approved by the principal of the school they 
attend. This applies to cities of the tirst, second, or third 
class. 

4. The Regulation of the Employment of Women. — 
Hours of Labor. — In iq2o, all but six states had some limi- 
tation on the hours of labor of women. In most of the 
states, tlie number allowed was less than sixty a week. 
Usually the law excepts work in homes or on farms. In 
some states the regulation applies merely to cities and 
towns. In those states where the canning industry exists, 
it is frequently exempted from the application of the law. 
This is done on tlie ground that tlie perishable product must 
be handled when it comes in in order tliat loss may be 
prevented. Some of the early laws were almost nullitied 
by allowing overtime. Now some allow overtime for such 
things as the stoppage of machinery, or at such times as 
the Christmas holidays. It is well to provide for varia- 
tions in the number of hours allowed in ditlerent businesses. 
The approved method of doing this is to have a commission 
which sets after investigation the number of hours allowed. 
The laws have been upheld as constitutional on the ground 
tliat it is necessary to protect the health of women in order 
to preserve strength and vigor to the race. 

Xi^ht-Work for Women. — In iq:;o, twelve states pro- 
hibited night-work for women. The common form of pro- 
hibition is that no woman shall work between hours of 10 
p. M. and 6 a. m. The idea back of this regulation is that 
if women work at night they do not get proper rest in tlie 
daytime, the time during the day being often taken up 



Legal Regulation of Employment 135 

with housework. The eye-strain involved in working with 
artificial light is great, and there are moral dangers often 
in going and coming from work. The United States Su- 
preme Court has not yet passed on the constitutionality of 
such laws. 

Prohibited Employments. — Some states prohibit the work- 
ing of women in mines, and in some processes, such as 
polishing. New York forbids their employment as core- 
makers in foundries where the cores are baked in the 
room in which they are made. 

5. The Minimum Wage for Women and Children. — The 
application of the minimum wage has been justified ordi- 
narily on the ground that it applies to certain groups of 
workers who, because of their weak bargaining position, 
may be exploited by the employers. Fifteen states now 
have laws applying to women, or to women and children. 
Ordinarily in this country men prefer to have wages set 
by union activity, and there is doubt about the constitu- 
tionality of such laws for men. The laws are usually stated 
in general terms, such as providing that women shall get 
a wage sufficient to "maintain health and welfare." The 
best plan for administering the law seems to be the com- 
mission plan. A state commission, either directly itself, 
or through subordinate commissions on which represen- 
tatives of the employers and the workers and the public 
are included, holds an investigation of the particular in- 
dustry. The wages have not on the whole been extremely 
high. The usual plea is that the industry cannot afford 
to pay high wages. The public is coming to take the posi- 
tion, however, that no industry should exist which cannot 
pay its own way. No industry should expect other in- 
dustries to contribute to the support of its workers. Es- 



130 Introduction to Econoinic Problems 

pedal provision is frequently made for handicapped work- 
ers and for learners. This provision usually is that some 
representative of the commission may grant what amounts 
to a license to work to the person after an investigation, 
and can set the proportion of the full wage which the per- 
son is to get. The justification for this provision is the 
fear that employers if unregulated might get all of their 
work done at less than the standard rate by the use of the 
handicapped or by the use of learners. In most of the 
states, penalties for violation are provided; however, in 
Massachusetts the enforcement of the law is left to public 
ojMnion. 

6. The Regulation of the Conditions of Employment of 
Men.' — There has been less of this than regulations for 
women and children. The men have been considered capa- 
ble of taking care of themselves. 

Hours of Labor. — The constitutionality of general laws 
regulating the hours of labor of men in all industries has 
been doubtful. There is no question of the power of the 
government to determine the conditions of employment on 
all public works. So, the federal government, most states, 
and most cities have laws prescribing eight hours as a day's 
work. In other than public work some ground must be 
found for the limitation of hours. Thus, in railroad trans- 
portation, to prevent accidents men handling trains are 
not allowed to work more than sixteen hours continuously. 
In mining, because of the danger involved, sixteen states 
have laws limiting the hours of labor to eight. Some states 
have laws regulating the hours for workers in smelters, 
and others for workers in tunnels where the time allowed 

' Cf. Commons and Andrews, I'rinciplcs of Labor Legislation, pp. 
247-271. 



Legal Regulation of Employment 137 

depends upon the air-pressure in which the work is carried 
on. The Oregon law placing the limit of ten hours a day 
on all labor has been upheld by the Supreme Court of the 
United States. 

7. Exercises. — i. Why not leave sanitation and safety 
to the self-interest of the employers? 

2. To what extent are workers to blame for accidents? 

3. What interest has society as a whole in the prevention 
of accidents ? 

4. What is the best method for legislating about sani- 
tation and safety ? 

5. Why not leave children to the care of their parents? 

6. Why is night- work bad for children? 

7. Explain the attempts to get federal regulation of 
child labor. 

8. What would you suggest as a better criterion than 
age for deciding whether or not a child shall be allowed to 
work? 

9. Why are boys allowed to go to work earlier than 
girls ? 

10. What connection should there be between the com- 
pulsory educational requirement and the regulations about 
child labor? 

11. Why should women in homes be allowed to work 
longer than those in factories? 

12. How can you justify the limitation on the freedom 
of a woman to work as long as she wishes? 

13. What are the objections to night- work for women? 

14. In these days of equal rights for women, why should 
they be prohibited from working in some employments ? 

15. If wages are "the discounted marginal product of 
labor," what will be the effect of setting by law a minimum 
wage for women? Make various assumptions as to the 
rates set. 

16. Should the minimum wage for women cover more 
than the physiological minimum of subsistence? 



138 Introduction to Economic Problems 

17. Should the minimum wage for women be enough to 
support more than the woman herself? 

18. Why are special provisions in minimum wage laws 
necessary for the handicapped and learners? 

19. What is the constitutional difficulty about labor 
legislation for men? 

20. Why do we have agitation for eight-hour-day laws? 
Why not seven, six, five, four, or three hour day laws ? 

21. On what grounds are laws limiting the hours of work 
of men in particular occupations based ? 



CHAPTER IX 
LIFE AND PROPERTY INSURANCE 

I. The Function of Insurance. 2. The Insurable Risk. 3. The 
Moral Hazard. 4. Fire Insurance — Schedule Rating. 5. Other Prop- 
erty Insurance — Marine Insurance — Boiler Insurance — Title Insurance. 
6. Life Insurance — Calculation of Premium — Ordinary Life — Limited- 
Payment Life — Endowment — Dividends — Life Insurance and Invest- 
ment. 7. Exercises. 

• 

I. The Function of Insurance. — Insurance is the co- 
operative bearing of losses. Sometimes the insurance com- 
pany is organized on a mutual basis. But, even if the 
company is organized by individual enterprise and run for 
private profit, the effect is the same. Individuals take a 
small, certain loss (the premium paid) in order to protect 
themselves from the disaster which would follow if the big, 
uncertain loss should happen to come on them. Thus, we 
may say that, in effect, those whose houses are insured 
against fire and who have no fires pay the loss of those 
who have fires. For a few dollars a year, each householder 
can be protected against loss of $1,000 by fire. 

The business man faces many hazards. Some can be 
insured against; for some of the risks the speculative mar- 
kets provide a means of hedging which is the equivalent of 
insurance; for some, however, there is no insurance and the 
business man must bear the risk. 

Insurance plays an important part in many financial 
transactions. Whenever property forms the security for a 
bank loan or the basis of a bond issue, it must be insured. 
Obviously no one would wish to loan money on security 
which might vanish in a few minutes. 

139 



140 Introduction to Economic Problems 

To understand insurance we must grasp the meaning of 
insurable risk and the moral hazard in insurance. 

2. The Insurable Risk. — The meaning of this term may 
be approached from the common idea of the ''law of aver- 
ages." If we flip a coin a large number of times, we may 
expect heads and tails to come up an equal number of 
times. Nothing is more uncertain than whether "Babe" 
Ruth will get a hit a particular time at bat. But when we 
take even a short period, we can count on his making a 
high percentage of hits and a dependable number of home 
runs. The United Cigar Stores count the people passing 
given points and locate the store on the basis of the in- 
vestigation. They know that a certain percentage will 
become customers. Storekeepers know that a certain per- 
centage of their customers will want 1$% collars. 

Now there are certain hazards which we may say follow 
the law of averages and so give an insurable risk. For 
example, nothing is more uncertain than the question of 
whether a particular building will burn, but if we take a 
large number of widely distributed buildings we can pre- 
dict with great accuracy the number which will burn in a 
year. Thus, if one out of a thousand houses burn each 
year, a mutual company with volunteer officials could 
insure the houses at the rate of $1 for each $1,000 insur- 
ance. 

Again, the duration of life of any one individual is very 
uncertain, but if we take large groups of men we can pre- 
dict the average duration of life and so can calculate the 
amount which must be paid as a premium to accumulate 
enough to make a payment of $1,000 at the death of each 
of the insured. 

We may say, then, that an insurable risk exists if the 



Life and Property Insurance 141 

hazard occurs with predictable regularity. Therefore, the 
extension of the field of insurance depends on the growth 
of definite information about hazards. 

3. The Moral Hazard. — Even if an insurable risk exists 
it may not be feasible to meet it by insurance, because of 
the moral hazard. The moral hazard is that the event 
will take place not accidentally, but by deliberate intention 
of the insured. Thus, the moral hazard in fire insurance 
is that the insured will set fire to his own premises. The 
moral hazard in life insurance is suicide. If we cannot 
control the moral hazard it is obviously impossible to pro- 
vide insurance. Especially with new forms of social in- 
surance it is difficult to predict to what extent the moral 
hazard will hamper. Thus, in unemployment insurance 
there is danger that a man might prefer the insurance pay- 
ment without working, to full wages and working. 

4. Fire Insurance. — In fire insurance we say there is an 
insurable risk because if we take a large group of houses 
or buildings we can predict the number of fires which will 
occur with sufficient accuracy to enable us to find out how 
much we must charge each individual in order that the loss 
(or at least part of it) of those whose houses are burned 
may be paid to them. The premium, as it is called, in 
fire insurance then involves the payment for the loss and 
also the amount necessary to compensate the men who 
carry on the business. The first amount is called the net 
or mathematical premium, and the sum of the first and the 
second, the gross premium. The moral hazard in fire in- 
surance is that the fire occurs, not as an accident, but as the 
result of the activities of the owner. In other words, we 
say that the moral hazard in fire insurance is arson. 

Fire insurance is particularly instructive because of the 



142 Introduction to Economic Problems 

careful and accurate gradation of the premium to the risk. 
A widely used method of fixing premiums is to follow the 
Universal Mercantile Schedule.^ This schedule starts with 
the standard city which comes up to certain specifications 
with regard to water system, fire-fighting equipment, pav- 
ing of streets, police, building law, and fire record. In this 
standard city, the standard building must come up to speci- 
fied requirements as to number of stories, and methods of 
construction. There is a basis rate of 25^^ per $100 charged 
for the standard building in the standard city. The actual 
rate is found by adding to the rate for all failures to come 
up to the required standard and subtracting from it for 
exceptionally good features. Thus, if the city has no fire 
department, the rate is increased by 32^. A shingle roof 
adds 15^. Open elevators add 12^. Hot-air-furnace heat 
adds 3^. If the street is inaccessible and unpaved, it adds 
10^. Terra-cotta and cement chimneys add 50^. For 
exceptional construction and conditions, deductions are 
allowed. For no cellar, deduct 10 per cent. If the grade 
floor is fireproof, deduct 10 per cent. If metallic studs and 
lathing are used, deduct 10 per cent. An automatic fire- 
alarm causes a deduction of 5 per cent. Automatic sprin- 
klers cause deductions of from 25 to 40 per cent. Next must 
be considered the problem of how the building is occupied. 
Each possible use has an effect on the hazard ; a retail drug- 
store adds 10 per cent. Deductions are made for nearness to 
hydrants and special fire-fighting appliances. Thus it is seen 
that the attempt is made to allow for everything which may 
have a bearing on the chance of causing damage by fire. 

The better-managed companies watch carefully the dis- 
tribution of their risks. They will not take more than a 
^Heubner, S. S., Property Insurance, pp. 193 #. 



Life and Property Insurance 143 

certain number of risks in one city. In the case of New 
York City they divide the city into districts and restrict 
the amount of insurance they write in each district. They 
aim, thus, to avoid the conflagration hazard, the danger 
of a large section of a city burning. 

5. Other Property Insurance. — Marine Insurance. — In 
land transportation, the carrier assumes the risks. In 
water transportation, the shipper must provide the insur- 
ance. Thus, in the development of credit instruments in 
foreign trade the marine-insurance policy is one of the 
important documents. In the matter of organization 
marine insurance is notable because of the large amounts 
which are provided by individual underwriters. However, 
insurance companies are now obtaining an increasing share 
of the business. 

Boiler Insurance. — This type of insurance provides 
against the hazard of boiler explosion. It is very interest- 
ing because almost all of the premiums received by the 
companies are spent in inspection and prevention of acci- 
dents. The whole theory of the practice is that, with 
proper care, no explosions need occur. 

Title Insurance. — In the older sections of the country 
where the real estate has passed through many hands, 
there is always a chance that there may be a flaw in the 
title to the property. For a long time abstracts of titles 
have been common. Now companies will insure the title. 
The companies assume that their examination of the title 
is so thorough that there will be no loss. They agree to 
pay losses which result from errors in examination or de- 
fects which were not discovered. Title insurance is of 
great importance in mortgage loans. It enables a lender 
to make sure that the property put up as security can be 
counted on if he wishes to foreclose. 



144 



Infroducfion to Economic Problems 



6. Life Insurance. -This tyi)c of insurance is rather 
more comph'cated because it is insuring against a hazard 
whicli is hound to occur. One may carry fire insurance 
for many years and never have a fire, but ultimately we all 
must die. Fire insurance is ordinarily carried on the 
basis of insurance by the year or for a short number of 
years, bul Ihc life-insurance contract ordinarily runs for 
life or a lon^ period of lime. A policy may run for seventy 
years or even longer. Life insurance satisfies the require- 
ment that there must be an insurable risk. That is, if we 
take a large enough group of men, we can predict the num- 
ber of men at different ages who will die each year. 

In order to make clear the essential nature of life insur- 
ance, a brief description of a method of computing life- 
insurance j)reiniums may be given. The method given is 
not the one used by the actuaries in their computation 
but is mathematically equivalent. 

We start with the American Experience Mortality Table, 
This table aims to show what deaths would take place in a 
group of 100,000 males aged ten years old. The computa- 
tion of the premium for age thirty-five will be shown, so 
the first, the last entries in the table, and a part near thirty- 
iive will be given. 

SICI.ECTION IROM TlIK AMKRICAN EXPERIENCE 
MORTAIJTY TABLE 



Age 


Niimhcr Living ill Ihc 
Hcninning of the Year 


Numl)cr Dying During 
the Year 


10 


100,000 

99.251 
81,822 
8 1 ,090 
Ho,353 
3 


749 
746 

732 
737 
742 

3 


11 


-IS 


36 

37 

95 



Life and Property Insurance 



145 



To start with we find the net single premium. It is 
called "net" because it does not allow for the expense of 
doing business. It merely gives the amount, which if paid 
by a group of men aged thirty-five, would, along with in- 
terest accumulations, furnish funds enough to give the 
beneficiaries of each poHcyholder $i,ooo when each death 
occurred. We assume that the premium is paid at the 
first of the year and the death claims at the end of the 
year. It is assumed that 3 per cent can be earned on the 
invested funds. This rate seems low, but the insurance 
company must play safe. The contract may run for sev- 
enty years, and many things may happen to the interest 
rate in that time. We find the present worth of the 
amounts of money needed to make the payments each 
year. Seven hundred and thirty-two die the first year. 
The present worth of $732,000 at 3 per cent true discount 
is found by dividing by 1.03 or multiplying by .970874. 
We could make a table for all of the years after thirty-five 
as follows: 



Age 


Amount Needed to 
Pay Policies 


Present Worth at 3% 

Discount Compounded 

Annually 


■^'; 


$732,000 X .970874 
737,000 X .942596 


= $710,679.77 
= 694,693.25 


36 

95 

Total 






$34,355,666.83 







Thus $34,355,666.83 would provide $i,ooo at the death 
of each of the 81,822 men who started at age thirty-five. 
Dividing the amount by 81,822, we find that each would 
need to pay $419.88 as the net single premium. It is 
called a single premium because it is paid once for all. 



146 Introduction to Economic Problems 



However, most men do not wish to pay for their insur- 
ance all at once. They prefer to pay in yearly instalments. 
In what is called an ordinary life policy, the payment is 
continued until death. We attack the problem of comput- 
ing the net annual premium by finding how much the 
present worth of a payment of $i a year from all of the 
survivors would be. We assume the payment is made at 
the first of the year. 

PRESENT WORTH OF $\ A YEAR FROM SURVIVORS 



Age 


Total Payment 


Present Worth 


35 

36 

37 

95 

Total 


$81,822 X I 
81,090 X .970874 
80,353 X .942596 


= $81,822.00 
= 78,728.17 
= 75,740.42 






$1,629,648.77 







If $1,629,648.77 is the total from a contribution of $1 a 
year from each survivor, in order to pay for all the claims 
we would need 34,355,666.83 divided by 1,629,648.77, or 
$21.08 as a net annual premium. 

To get the premium actually charged by the insurance 
companies, an expense loading is added. The law allows 
a loading of one-third the net premium. 

Net prL'inium $21 .08 

Loading 7 . 03 

Gross premium $28 . 1 1 

Limited-Payment Life. — Many men do not wish to keep 
on making payments as long as they live. They prefer to 
complete the payments during the time of their maximum 
earning power. Perhaps the commonest period for pay- 



Life and Property Insurance 



147 



ing premiums is twenty years. To calculate the premium 
necessary, we find the present worth of $i a year from the 
survivors as before but stop after twenty payments have 
been made. 

PRESENT WORTH OF $1 A YEAR FROM SURVIVORS 



Age 


Total Payment 


Present Worth 


35 

36 

37 


$81,822 X I 
81,090 X .970874 
80,353 X .942596 


= $81,822.00 
= 78,728.17 
= 75,740.42 


S4 


Total 






Si, 1 50,932. 79 







It is interesting to see that the present worth of the 
twenty payments, $1,150,932.79, is over two-thirds of the 
amount for the sixty years in the former case. The present 
worth of the payments of forty years after age fifty-five is 
small because of the heavy discount involved and because 
of the lessened number of survivors. Dividing as before 
the amount necessary to make the $1,000 payments at 
each death by the present worth of $1 a year from all the 
survivors, we get the net premiums as follows: 

$34,355,666.826-^$I, 150,932. 798 =$29.85. 

The New York law allows a loading equal to that of the 
ordinary life plus one-sixth of the amount the net premium 
is greater than the net premium on the ordinary life policy : 

Net premium $29 . 85 

Loading 8 . 49 

Gross premium $38 . 34 

Twenty-Year Endowment. — This is not a straight insur- 
ance policy. It involves two provisions. If the holder 



148 Introduction to Economic Problems 

dies within the twenty years, his beneficiary gets the $i,ooo 
insurance. If the holder is aHve at the end of twenty years, 
he gets the $i,ooo. So, we must provide insurance for 
those who die and endowment for those who live. 

We need a new calculation of the cost of insurance, since 
the policy now covers only twenty years: 

AMOUNT NEEDED TO PAY INSURANCE 



Age 


Total Payment 


Present Worth 


35 

36 

54 

Total 


$732,000 X .970874 
737,000 X .942596 


= $710,679.77 
= 694,693.25 






$12,553,331.24 







The table shows that there will be 64,563 survivors. 
The present worth of $1,000 to be paid to each of them at 
the end of twenty years is $35,746,983.59. Dividing each 
of these totals by $1,150,932.80 (the present worth of $1 
a year from each of the survivors), we get the net premiums 
for the insurance and the endowment. 

Net annual premium for the insurance $10.91 

Net annual premium for the endowment 31 .06 

Net annual premium for the loading 9-94 

$51-91 
The loading is limited by a Wisconsin law to one-third 
of the net premium for the limited-payment life for the 
same period ($29.85), so it cannot exceed $9.95. Endow- 
ment policies are also written for other periods than 
twenty years. 

There are many other forms of policies suited to all 
sorts of needs. The foregoing account illustrates the prin- 
ciples upon which they are all calculated. 



Life and Property Insurance 149 

Life insurance does not consider the variations in risks 
as minutely as fire insurance does. Each applicant must 
pass a medical examination. If he comes up to certain 
standards, he is insured; otherwise most companies will not 
insure him. Some companies insure substandard risks by 
charging an extra premium, based on the character of the 
impairment. Other companies agree to insure a man of 
forty with certain impairments if he pays the premium for 
age fifty. The insuring of the impaired is being done in- 
creasingly as more definite information about the eflfect of 
impairments on the length of life becomes available. 

Dividends to Policyholders. — Many insurance companies 
nowadays are carried on under the participating plan. 
That is, the insurance company aims to provide insurance 
to the policyholder at as low rate as possible. The com- 
pany takes the policyholder only after a medical examina- 
tion. This means that the actual mortality experienced 
will probably be less than that predicted in the mortality 
table. Then, since the company must play safe with refer- 
ence to the amount of interest they can earn, usually over 
long periods of time they earn a higher rate than that on 
which the premium was calculated. Then often, they also 
conduct their business at less cost than they allow for in 
the expense loading. Savings from all of these sources, 
that is, less mortality than was expected, a higher rate of 
interest earned than was calculated upon, and less expense 
than was allowed for, are returned to the policyholders in 
the form of what are rather incorrectly called dividends. 
Dividends are really a return of overcharges. 

Life Insurance and Investment. — The function of insur- 
ance as co-operation in bearing losses is indispensable. If 
a man has many pieces of property widely scattered, he 



150 Introduction to Economic Problems 

may carry his own fire insurance. That is, he may take 
the risk, and it is assumed that the fire losses will not be 
greater than the premiums he would be obliged to pay to 
the insurance company, and so he can meet them if he sets 
that amount aside. But a man cannot insure his own life. 
There is no way in which he can get the law of averages to 
work. He may set aside the amount of the life-insurance 
premium, but if he dies soon that would be of small use to 
his beneficiary. Unless he has abundant means to provide 
for his family, he must get the co-operation of others in 
providing insurance. Insurance as an investment does not 
have the same indispensability. It has some things in its 
favor. It is safe, if taken out in any of the big, well-known 
companies. Many find it a convenient method of saving 
small sums regularly which would be difficult to invest on 
account of their smallness. Some people need the com- 
pulsion which comes from the engagement to pay regularly, 
and the services of the life-insurance agent to see that the 
payments do not lapse. The chief objection to insurance 
as an investment is the rate of return, which, because of 
the expense of conducting the business, is low, even when 
the safety is allowed for. 

7. Exercises.— I. Explain carefully how insurance is co- 
operative bearing of losses when it is carried on by stock 
companies. 

2. List the risks to which the business man is exposed. 
Against which of them can he insure himself? 

3. Is there an insurable risk in the ones against which 
the business man cannot insure himself? 

4. Is there an insurable risk in the chance of a student 
failing in Economics 2 ? If so, how would you determine it ? 

5. What would be the moral hazard in the insurance 
mentioned in question 4? 



Life and Property Insurance 151 

6. How does business depression affect the moral hazard 
in fire insurance? 

7. Is it fair for two men to get the same benefit from 
life insurance when one pays premiums for two years and 
the other for fifty years? 

8. How much life insurance does a business man need? 

9. Discuss life insurance as an investment. 

10. What effect on the amount of dividends on life-in- 
surance policies would you expect from (a) the higher rate 
of interest now obtainable on investments? {h) the influenza 
epidemic? (c) the increase in wages and salaries? 

11. Why will not people insure their fives without hav- 
ing a life-insurance agent persuade them? 

12. What is the banker's interest in fire insurance? 

13. Explain how it is possible for a large corporation to 
carry its own fire insurance. 

14. Can a wealthy man carry his own life insurance? 

15. Does fire insurance eliminate the loss due to fires? 

16. What are the dangers of local mutual fire-insurance 
companies ? 

17. What are the advantages of country- wide mutual 
fire-insurance companies? Are there any disadvantages? 

18. What is the importance of marine insurance in for- 
eign trade? 

19. Explain the system of conducting title insurance. 

20. What is the theory underlying the conduct of boiler 
insurance ? 

21. In what respect is insurance similar to gambling? 
In what respect dissimilar? 

22. "Insurance works toward a greater equality in the 
distribution of wealth." Is this true? Why or why not? 



CHAPTER X 
SOCIAL INSURANCE 

I. The N('C<1 for Social Insurance. 2. Kcspoiisihility for Acciflent3 
Under the ("oninion Law — ^Contril)iitory NcKliKt'i't — The IJurdcn of 
the ()c:c:u|)ational Kisks — Assunii)ti(jn of Risk — The I'ellow-Servant 
Doctrine. 3. I^nployers' l,ial)iHly Laws. 4. Workmen's Compen- 
sation Laws. 5. The New York ("omi)ensation Law and Other Laws 
— Injuries Compensated — Industries Covered — Persons Compensated 
— liurdcn of I'aymcnt — Compensation for Death — Compensation for 
Disal)ility — C'arrier for the Insurance. 6. Health Insurance — Hazards 
of Industry -Health Insurance in ICurope — Henefits. 7. Old-Age and 
Invalidity Insurance -Old- A^^e Pensions in Lnj;;land-— The German 
.System. 8. Unemployment Insurance — The (ihent System — Out-of- 
Work Henefits of Lahor-lJnions — The British System. 9. Exercises. 

I. The Need for Social Insurance. — Insurance has been 
defined as the co-operative bearing of losses. It may be 
carried on by j)rivate companies. We speak of social in- 
surance when the state carries on tire insurance, subsidizes 
it, or makes it compulsory. The reason for the compulsion 
lies in the faihire, or inability to insure, of those subject 
to some hazard. 

Typically, social insurance aj)plies to some hazard to 
which workmen are expo.sed. Their wages are relatively 
low, and it is difhcult for them to provide anything to meet 
the hazard of sickness, unemployment, or death. When 
such a disaster comes to a family, it often means the break- 
up of the family, or dependence on public or private charity. 
Once the dependence on charity is begun, it frequently 
means permanent dependence. Observation of such con- 
ditions has led many people to the conclusion that some 
remedial measures need to be taken. Compulsory insur- 

153 



Social Insurance 153 

ance has many advocates. They do not think that indi- 
vidual initiative will handle the situation. 

Workmen's compensation is everywhere the commonest 
form of social insurance. It provides payments for acci- 
dents in industry. 

2. Responsibility for Accidents Under the Common 
Law. — Under the common law, the employer usually es- 
caped paying for losses due to accident because he could 
use certain defenses: contributory negligence, occupational 
risk, assumption of risk, and fellpw-servant doctrine. 
These may be taken up in turn. 

Contributory Negligence. — In most accidents, it can be 
shown that if the injured had done something or had not 
done something, the accident would not have occurred. 
So it is easy to say that the worker is partly to blame; and 
it was the law that the employer could not be held respon- 
sible, even though he had been negligent. The modern 
attitude is a frank recognition of the failure of the human 
body and human attention to function perfectly in the 
average individual. The laws now provide for compensa- 
tion unless there has been gross negligence on the part of 
the injured man, and sometimes even when there has been 
such negligence. 

The Burden of the Occupational Risks. — Some occupations 
have a greater hazard than others. The common law pre- 
sumed that the man entering the employment understood 
its hazards and assumed them, possibly because of some 
increase in pay. This may have been a fair assumption 
in the earlier, simpler economic organization which was 
characteristic of the period in which the common law took 
form, but it is certainly not true to-day. Wages are 
not always higher in dangerous trades, and even when 



154 Introduction to Economic Problems 

they are higher, they do not compensate for the added 
risk. 

Assumption of Risk. — According to the common law, the 
employer was held responsible for providing safe working 
conditions. But there grew up a doctrine that if a worker 
continued to work with a machine that was not safe, he 
assumed the risk for any accidents which might arise from 
the defective machine. If a worker had complained about 
a machine which caused an accident, that fact was urged 
in the trial as proof that he knew of the defect and so had 
assumed the risk of working with the machine. 

The Fellow-Servant Doctrine. — The common law relieved 
the employer of liability in case the accident was due in 
any measure to a fault of a fellow servant. This seems 
fair enough in a simple organization of society where a man 
could know personally his fellow servants and could watch 
out for the careless or refuse to work with them. But 
how can we say that an engineer running from New York 
to Philadelphia is responsible for knowing the frailties of 
all of the switchmen who might make mistakes while he is 
guiding a train between the two cities? 

3. Employers' Liability Laws. — A first step in advance 
was taken in some jurisdictions by passing laws which made 
the employers liable for accidents. However, this brought 
but little relief, for employers insured their liabiUty in 
casualty companies. An injured employee was forced to 
sue for damages. The worker rarely had the courage to 
antagonize the employer. If he did sue, the case would 
be long drawn, and if the worker won it would be appealed. 
The practical result was that only a very small part of the 
money the employers paid as premiums ever reached the 
workers as compensation. Even if the worker won, much 



Social Insurance 155 

of the damages usually went to his lawyer. His financial 
condition often made it necessary for him to hire his 
lawyer on the contingent-fee basis. 

4. Workmen's Compensation Laws. — For social insur- 
ance against accidents in industry, the laws are ordinarily 
called Workingmen's Compensation laws to distinguish 
them from the earlier Employers' Liability laws. The laws 
came relatively late in the United States. But once the 
movement started it quickly spread. Forty- two states 
enacted compensation laws in the years 1911-1919. 

There can be no question about the existence of an in- 
surable risk. Accidents occur in industry with predictable 
regularity. The yearly toll in the mines, on the railroads, 
and in other industries would make a gruesome list. 

The moral hazard in accident insurance is the possibility 
that the worker will deliberately allow himself to be maimed 
in order to collect the insurance. Opponents of the system 
predicted that many such cases would occur. On the 
whole, experience has shown the fear to be groundless. 
The laws usually do not cover accidents due to gross negli- 
gence of the worker. 

In our study of compensation laws we will follow the 
provisions of the New York law, pointing out the different 
practices of other states on various provisions. 

5. The New York Compensation Law and Other Laws.^ 
— In the first place, the New York law is a compulsory law. 
With regard to the employer this means that he must 
make the payments specified in the law. With regard to 
the employee this means that the injured workman cannot 
sue the employer; he must be content with the compensa- 
tion provided by the law. Fourteen other states have com- 

^ Cf. Bulletin of U. S. Bur. of Labor Statistics No. 2^2, p. 49. 



156 Introduction to Economic Problems 

pulsory laws and thirty-one states elective laws. Under 
the elective law, if an employer wishes he may refuse to 
accept the law. If he so refuses, then he, in most cases, 
cannot use the ordinary common-law defenses if an acci- 
dent occurs. Without these defenses the employer has not 
much chance of winning the suits brought against him. 
Laws elective for the employee grant him the right to sue 
the employer instead of taking the compensation provided 
by the law, but allow the employer to use the old defenses, 
so that a good defense usually can be made. 

Injuries Compensated. — Accidental injuries out of and 
in course of employment, and disease or infection naturally 
and unavoidably resulting therefrom, causing disability for 
more than two weeks, or death, unless caused by the wilful 
intention of the injured employee to bring about the injury 
or death of himself or another, or by his intoxication while 
on duty, are covered. 

An amendment to the New York Workmen's Compen- 
sation law in 1920, §49-a, enumerates certain diseases 
which are to be compensated as such and regardless of any 
accidental origin. They are: anthrax, poisoning by lead, 
mercury, phosphorus, arsenic, wood alcohol, nitro and 
amido derivatives of benzine, carbon bisulphide, nitrous 
fumes, nickel-carbonyl, dope, gonioma kamassi; chrome 
ulcerations, epitheliomatous cancer or ulceration of skin 
or corneal surface of the eye due to tar, pitch, etc. ; glanders, 
compressed-air illness, six diseases due to mining, and 
cataract in glass-workers. 

The New York law is broader than the laws of most 
other states in its inclusion of diseases arising out of em- 
ployment, or "industrial diseases," as they are called. 
Most of the other states insist on a narrow interpretation 



Social Insurance 157 

of accident, which excludes anything which does not hap- 
pen suddenly. The New York law and the laws of several 
other states also require payments for disfigurement, even 
though the accident caused no direct loss of earning power. 
Generally the states restrict compensation to cases which 
impair earning power. 

Industries Covered. — The industries covered are hazard- 
ous employments, including extensive classified lists cover- 
ing forty-five groups; also all other employments not so 
enumerated, in which four or more workmen or operatives 
are regularly employed, domestic and farm labor excepted. 
The exclusion of farm and domestic labor is found in nearly 
all states. It probably is the result of the political strength 
of the farmers, for certainly farming is an industry with 
much hazard, especially in harvesting and threshing. 
Much confusion arises over the question of which indus- 
tries are hazardous. One might think that the fact of 
accident would indicate that the industry was hazardous. 
However, in New York the question is of little importance, 
since the provision about four or more workmen is very 
inclusive. 

Casual labor is frequently excluded. No doubt this 
makes for administrative convenience, but surely the re- 
sults of accidents are no easier to bear when they are the 
result of casual labor. 

Many states follow New York in not including domestic 
labor. Perhaps, because of the difficulty of administering 
the law in such cases and the feeling that the occupations 
are not hazardous. In some states the act does not ap- 
ply to establishments having less than some specified num- 
ber of employees, from ten down to two. This makes for 
ease of administration, but does not protect the workers, 



158 Introduction to Economic Problems 

and in truth is but an indirect way of excluding farm and 
domestic labor. 

If a New York employee of a New York company is in- 
jured on a piece of work which takes him to another state, 
he still can claim compensation. Much confusion has 
arisen in attempting to protect the workers on the railways, 
for Congress controls the part that is interstate commerce, 
and the states the part that is intrastate commerce. It 
is obviously difficult to determine whether the man is in- 
jured in interstate or intrastate commerce. 

Aliens are covered as well as citizens, although, in their 
case, there is some limitation about the number of de- 
pendents. 

Persons Compensated. — In private employment, all the 
employees in industries covered are compensated. Those 
in public employment are also included. 

Burden of Payment. — In New York, as in the states gen- 
erally, the entire cost is on the employer. The money for 
the compensation is paid by him. To a considerable ex- 
tent, this cost merely takes the place of payments for Ha- 
bility insurance, costs of lawsuits, and donations to the 
injured which he was forced to make under the old system. 
If the payments are greater than formerly, it is expected 
that he will recoup himself by increasing the price of his 
product. The feeling is that consumers have no right to 
expect that workers or their families should bear the burden 
of accidents incident to the production of commodities. 
Some laws specifically provide that the payments shall not 
be deducted from the wages of the workers. In the long 
run it is impossible to determine whether or not the pay- 
ments by employers cause wages to rise less rapidly than 
they otherwise would. 



Social Insurance 159 

Compensation for Death. — In New York in case of death 
$100 is allowed for funeral expenses. Then there is paid 
to a widow or dependent widower alone 30 per cent of the 
wages of the deceased, with 10 per cent additional for each 
child under 18. Dependent orphans under 18 receive 15 
per cent each, as also do dependent parents, brothers, or 
sisters. The aggregate payments in no case can exceed 
66^ per cent of the wages of the deceased. Payments to 
widow or widower cease on death or remarriage or when 
dependence of widower ceases, with two years' compensa- 
tion on remarriage. Payments to children, brothers, and 
sisters cease at 18 and to parents when dependence ceases. 
A serious limitation to the benefits arises from the provision 
that no wages in excess of $100 a month are considered in 
the computation. 

In other states, there are wide divergencies in the com- 
pensation. A common form bases the compensation on the 
weekly wage, giving various percentages according to the 
number and relationship of the dependents. In Iowa, 50 
per cent of the wages is given to persons wholly dependent; 
however, not more than $10 or less than $5 a week. The 
payments run for 300 weeks. In other states the period 
varies; as 270, 350, and 500 weeks, and the percentages vary 
from 25 per cent to 66^ per cent. Some states make the 
payment a multiple of the yearly wage. Kansas gives 
three years' wages to persons wholly dependent, and sets 
the maximum at $3,800 and the minimum at $1,400. 
Oregon gives the widow $30 a month and $6 a month for 
each child, with a maximum payment of $50. 

Most states have an allowance for funeral expenses; 
$100 is the commonest limit. 

Compensation for Disability. — The New York law pro- 
vides medical and surgical treatment and hospital service 



IGO Introduction to Economic Problems 

for 60 days, or longer where the conditions require; the 
costs are to be approved by the commission. In some other 
states, unlimited care is given. During the continuance of 
permanent total disability, 66^ per cent of the wages are 
paid. Loss of both hands, arms, feet, legs, or eyes are con- 
sidered permanent total disability. In temporary total dis- 
ability the worker gets 66^ per cent of his wages, but not 
over $3,500 in all. In the case of permanent partial disabil- 
ity, 66^ per cent of the weekly wages is paid for specified 
periods: thus, for loss of thumb for 60 weeks; for loss of 
hand, 244 weeks; for loss of foot, 205 weeks; for loss of an 
eye, 128 weeks. The payments are not to be more than 
$15 a week except in case of the loss of a hand, arm, foot, 
leg, or eye, where they may be $20 a week. The minimum 
is $5 a week, or the employee's wages if they are less than 
$5 a week. 

The law specifies with great minuteness the various par- 
tial disabilities, distinguishing between the different fingers 
and joints of the fingers. Payments begin on the fifteenth 
day, but if the disability continues for more than forty-nine 
days compensation is allowed from the beginning. 

Most of the states provide for medical and surgical aid, 
but often the amount is inadequate; one state sets the 
maximum at $25. For total disability, the compensation 
is usually a fraction of the wages, ordinarily lying between 
one-half and two-thirds. Often limits are set, such as a 
minimum of $3 to $6 and a maximum of $8 to $16 a week. 
Very few of the states provide that the payments shall last 
until death. Some make limitations as to the number of 
weeks, such as 312, 400, or 500 weeks. Others set a total 
limit, such as $4,000 or $5,000. 

Carrier for the Insurance. — In New York, the employer 
must give proof of financial ability to make the payments 



Social Insurance 161 

(deposit of securities may be required), or must insure in 
the New York State Fund or a mutual or stock company. 

The great problems in this connection are the cost and 
the method of making sure that the worker gets his com- 
pensation. Some states merely provide that the employer 
must pay the compensation. In such a case the employer 
frequently insures in a casualty company. Some of the 
casualty companies have made it a practice to fight most 
of the claims. Some states have voluntary or compulsory 
and exclusive state funds. Here the problem is to fix the 
premium rates for the various industries so that each in- 
dustry will pay for its own accidents. Sometimes mutual 
companies are formed in given industries. These have the 
advantage of making it profitable to prevent accidents. 
On the whole, the compulsory state fund appears to give 
the greatest security to the worker at the lowest cost to the 
employer. 

In some states insurance is not required. This situation 
may nullify the law, for if the employer goes bankrupt there 
may be no compensation. Also there are difficulties in 
enforcing the liability. 

6. Health Insurance. — There is no question about the 
existence of an insurable risk with reference to sickness if 
wide areas and long times are considered. There are varia- 
tions in the rate of sickness in different localities due to 
various climatic factors and conditions of living. If we 
took the state as our unit, probably we would get statistical 
regularity. The influenza epidemic illustrates the need 
for considering long periods of time. 

The moral hazard in health insurance is malingering. 
Will some people pretend to be ill in order to get the insur- 
ance, or magnify small ailments? Obviously it is not so 



162 Introduction to Economic Prohlems 

easy to determine when a man is ill as to see that he has 
had an accident. 

In the United States there is no social health insurance. 
The insurance is voluntary and private. Often local so- 
cieties are formed which, of course, do not get wide dis- 
tribution of risk. The largest amount of health insurance 
probably comes from lodges and social orders. The visits 
to sick members and the fraternal feehng eliminate most 
of the moral hazard. Some industries, notably railroads, 
have developed insurance funds. The usual plan is to 
deduct a certain amount from the wages of each employee. 
In return, the employee gets medical and surgical attention 
and a payment for the time absent from work. Private 
insurance companies will write health insurance, but this 
part of their business has not had a great growth. 

Hazards of Industry. — Besides the ordinary problems of 
health, there are special hazards in industry. Certain broad 
classifications may be recognized.^ 

First, dust. Dust may be mechanically or chemically 
irritating, or it may be infectious dust. Carbon and stone 
working, grinding, polishing, sorting of rags, file and comb 
making are processes which expose the worker to harmful 
dust. This exposure may result in an enervated condition 
of the eye, ear, nose, and throat, and in tuberculosis. 

Second, variations in temperature. Work in iron and steel 
mills, glass factories, sugar-refining, bakeries, ice manufac- 
turing, kilns for pottery, tempering and handling metals, 
canning and preserving, and stoking furnaces all involve 
either high heat or changes in temperature. These varia- 
tions in temperature cause anaemia, general debility, rheu- 
matism, premature old age, cataracts, and stiff joints. 
^ Monthly Labor Review, vol, XII, pp. 645-648. 



Social Insurance 163 

Third, humidity. Some of the industries which expose 
the workers to dampness are pulp and paper mills, tanneries, 
some textile processes, canneries, sugar-refining, steam vul- 
canizing, dyeing, and cleaning. This humidity gives rise 
to diseases of the respiratory passages, neuralgia, and 
rheumatism. 

Fourth, poisons. Many substances used in industry are 
poisonous. The danger of lead-poisoning affects those in 
the mining and smelting of the metal, those who make lead 
articles, and those who make colors for painting. The lead 
attacks the fingers and the eyes. Amyl acetate is used in 
lacquering, enamelling, and gilding. It causes palpitation 
of the heart. Wood alcohol is used in the preparation of 
varnish and lacquer, perfumes, celluloid-making, and the 
manufacture of patent leather. It causes inflammation of 
the throat and attacks the optic nerve. Phosphorus is 
handled by those who make bone-black, bone-ash, tar 
colors, some fireworks and matches. It causes ulceration 
of the gums, the loosening and falling out of the teeth, and 
the destruction of the jaw-bones. Besides these, other in- 
dustrial poisons are ammonia, aniline oil, aniline dyestuffs, 
arsenic compounds, benzol, brass, carbon disulphide, car- 
bon monoxide, chlorine, chlorine derivatives, hydrochloric 
acid, mercury compounds, nitrous gases, phenol, picric 
acid, sulphur dioxide, sulphuretted hydrogen, sulphuric 
acid, trinitrotoluol, and turpentine. 

Health Insurance in Europe.^ — In Europe, social insur- 
ance of health has had wide development. Much diversity 
of practice and many problems have arisen which will need 
to be solved in the United States if we adopt health insur- 
ance. 

' Cf. Commons and Andrews, Principles of Labor Legislation, pp. 
417-422. 



1()4 Introduction to Economic Problems 

Workers Included. In luigland, all manual laborers be- 
tween the ages of sixteen and seventy, and all others whose 
earnings are less than $1,250 a year, are forced to insure. 
In Germany, insurance is compulsory for all work people 
and for people with incomes less than 2,500 marks who are 
works oCiUials, foremen, workers in stores, theatrical and 
musical ])eii"()rmers, teachers and tutors. In France, the 
health insurance is voluntary for all except miners, seamen, 
and railroad workers. 

Cost of Insurance. — Cost of insurance is usually divided 
between the employer and employee roughly in the pro- 
])()rtion of two-thirds for the employer and one-third for the 
eni})loyee; sometimes the state makes a contribution, e.g., 
in the case of England. 

MelJiod of AdniinistrulioH. In almost all of the coun- 
tries the administration is based upon previously existing 
local, industrial, or fraternal societies, but is subject to 
pul)lic control. The problem of providing doctors is some- 
what dithcult. Confidence in the tloctor is an important 
part of successful treatment. In luigland, agreements are 
made bi^ween the doctors as a group and the local insur- 
ance committees, and then the ])atient is allowed to choose 
from the list the doctor he j)refers. 

Benefits.— Tha benefits include medical care and cash 
payments. Where the premiums vary with the amount of 
wages, the benelit is some proportion of the wages. In 
England, where the contributions are uniform, the benefit 
is a flat sum. 

Under the English National Health Insurance there are 
provided: 

(i) A medical benefit, consisting of free medical atten- 
dance and medicine. 



Social Insurance 165 

(2) A weekly sickness benefit of 15 s. for men and 12 s. 
for women. The full amount is not given until the person 
has been a member for two years. The payment is made 
for 26 weeks if necessary. 

(3) A maternity benefit of 40 s. in a lump sum. 

(4) A disablement benefit of 7 s. 6 d. a week after the 
26 weeks of sickness benefit has been exhausted. 

The Leipzig local fund under the German system shows 
wide activities. It is run democratically by representatives 
elected, two-thirds by the workers and one-third by the 
employers. In some of the items, the Leipzig fund offers 
more benefits than the law requires. The benefits include: 

(i) Free medical treatment including medicine, spec- 
tacles, trusses, and other appliances. 

(2) If disabled, 55 per cent of the wages is given as a 
weekly payment for 34 weeks. 

(3) Or, in place of the above, treatment is given in a 
hospital, clinic, or convalescent home, with payments to 
the relatives of a fraction of the sickness pay. 

(4) A maternity benefit. 

(5) A funeral benefit. 

(6) Medical treatment and medicine for 13 weeks to un- 
insured members of the family and a funeral benefit for 
them. 

The workers are grouped into ten wage classes, and 4 
per cent of the average wages is collected from each of the 
classes. The workers pay two-thirds and the employers 
one-third of this amount. 

The fund controls convalescent homes, forest retreats, 
and rural resorts. 



166 Introduction to Economic Problems 

7. Old-Age and Invalidity Insurance.^ — This is a double 
hazard, (i) Will the person live to old age and will he 
need support, either because he is incapacitated or because 
he has not accumulated enough funds to live on ? (2) Will 
the person become incapacitated irrespective of his age? 
Probably the number who are invalided would be found to 
be fairly uniform. The amount of accumulation seems to 
be less susceptible to prediction. 

In agricultural sections the problem of old age is less se- 
rious. The providing of food and house room have not been 
difl&cult problems in the country, and often the old person 
can still perform some services. In the cities among the 
poorer people the care of the aged is a more serious matter. 

The moral hazard, if it exists at all, is the danger that 
provision for old age will discourage thrift. 

Pension systems have developed in some industries and 
some governmental employments. Often there are com- 
pulsory payments required of firemen, policemen, and 
school-teachers. Private saving is the method used by 
better-paid workers to meet old age, but this obviously has 
its limitations when applied to the lower-paid groups. 
Charity is called upon to meet many of the cases. 

Old-Age Pensions in England. — Old-age pensions in Eng- 
land may be taken as typical of one method of meeting 
the problem. Here the state bears the whole burden from 
funds raised by taxation. The person must be over seventy 
years old, a British subject for twenty years who has re- 
sided in the United Kingdom for twelve out of the last 
twenty years. The person's income must not exceed £49 
17 s. 6 d. The amount paid varies from 10 s. a week to 

^ Commons and Andrews, Principles of Labor Legislation, pp. 429- 
438. 



Social Insurance 167 

those whose incomes are not over £26 5 s. to i s. for those 
whose incomes are between £47 5 s. o d. and £49 17 s. 6 d. 

On March 31, 1920, there were 957,915 persons receiv- 
ing pensions. 

The German System. — The German system is a contrib- 
utory system; the worker and the employer each make 
contributions during the active period of the worker's Hfe. 
These must be invested until the time for payments arise, 
then the state adds a yearly contribution. The benefit is 
paid when the employee reaches the age of sixty-five, or 
when he is incapacitated for work. The greater part of 
the payments are to the incapacitated. 

8. Unemployinent Insurance.^ — The question of insura- 
ble risk is bound up with the problem of business cycles. 
Certainly there is no insurable risk unless we consider long 
enough times to cover periods both of prosperity and of 
depression. Certain occupations are seasonal, such as the 
building trades, canning, and some types of farming. In 
industries like these, should we compensate for the regular 
periods of idleness or merely for idleness which is greater 
than the normal? 

The moral hazard is voluntary idleness. To some men, 
half or two-thirds pay for idleness would appear more de- 
sirable than full pay for work. The system must provide 
some means for determining whether or not work is really 
lacking. 

The Ghent System. — The Ghent system is of limited ap- 
plication. The city of Ghent, Belgium, in 1901 agreed to 
supplement the out-of-work benefits paid by the trade- 
unions. The city felt that if the trade-unions were paying 

1 Cf. Commons and Andrews, Principles of Labor Legislation, pp. 

442-448. 



168 Infroducfioti to Economic Problems 

« 

benefits, probably there was no doubt about the inability 
to find work. The limitations are obvious. The system 
applies only to members of trade-unions, and it is non- 
contributory and really a form of charity. The system, 
however, has been rather widely accepted in other cities 
in Belgium, Great Britain, Germany, France, Switzerland, 
Italy, Holland, Denmark, Norway, and Finland. 

The city of St. Gall, Switzerland, in 1894, tried the ex- 
periment of compulsory unemployment insurance. Many 
administrative difftculties were encountered; so, after two 
years, the plan was dropped. The system dealt directly 
with the workers, and it was found difficult to collect the 
weekly payments from them. There was no adequate 
means for determining the fact of unemployment. The 
system had been started without knowledge of unemploy- 
ment, and so the rates charged were inadequate. 

Out-of-Work Benefits of Labor-Unions. — Such benefits are 
common in Europe, but are not much used in the United 
States. The Cigar Makers' Union is the only member of 
the American Federation of Labor which has a national 
system. Other unions, however, have systems of narrower 
scope. 

The British System. — The St. Gall policy of direct com- 
pulsion has had its latest and broadest application in the 
British Unemployment Law, which went into operation 
in 191 2. It is compulsory, but is applied at first only to 
certain industries where records have been kept and thus 
where the extent of unemployment is known. Contribu-. 
tions are made by the worker, the employer, and the gov- 
ernment. The benefit started at 7 s. a week; during the 
war it was raised to 15 s. a week. 

An amended act came into operation November 8, 1920. 



Social Insurance 169 

It added about 8,000,000 people to the scheme, bringing the 
total up to 12,000,000. Those in agriculture and domestic 
service are not included. Non-manual workers who get 
less than £250 are included. The insurance is paid from 
contributions by the workers, the employer, and the state. 
Thus, in the case of men, each week the employee pays 4 d., 
the employer 4 d., and the state 2 d. The unemployment 
benefit may be received for only fifteen weeks in any one 
year. Elaborate provisions are made to make sure that the 
man is really unable to find work. But the man is not re- 
quired to become a scab, or accept employment at less than 
the ordinary rate of wages, or where conditions of work are 
less favorable than he has been accustomed to. On the other 
hand, he cannot get the payment if his unemployment is due 
to a strike. Thus, the state attempts to take a neutral at- 
titude in strikes. It will not pay unemployment benefits to 
the strikers, nor will it force the unemployed to take the 
places left vacant by the strikers. Of course, a man who 
loses his job because of misconduct, or leaves his job vol- 
untarily without any just cause, cannot collect the unem- 
ployment benefit. 

The amount of benefit was increased to 20 s. for men, 
starting March 3, 1921; but the amount of unemployment 
was so great that on July i, 1921, it was cut to 15 s. The 
fund was in debt at that time. 

9. Exercises. — i. Why not have the government, out 
of funds raised by taxation, compensate for all of the hazards 
covered by social insurance? 

2. What were the common-law defenses used by the 
employer ? 

3. From the standpoint of maximum production of 
wealth, who should bear the losses due to accidents in in- 
dustry ? 



170 Introduction to Economic Problems 

4. Is there any better method of apportioning the cost 
of accidents than the attempt to find some one person who 
was to blame for the accident and make him pay for it ? 

5. What defects appeared in practice in the employers' 
HabiHty laws ? 

6. Why is the moral hazard slight in accident insurance? 

7. Should working men's compensation laws be com- 
pulsory or elective? 

8. Should diseases arising out of employment be classed 
as accidents ? 

9. Should disfigurement without loss of earning power be 
compensated ? 

10. Why are establishments employing only a few labor- 
ers often excluded from the provisions of working men's 
compensation laws ? 

11. Who ultimately pays the cost of working men's com- 
pensation ? 

12. Why is the compensation always less than the wages ? 

13. Discuss the advantages and disadvantages of having 
the compensation provided: 

(a) by the employer himself; 
(&) by insurance in private insurance companies; 
(c) by insurance in compulsory state funds; 
{(i) by insurance in voluntary state funds. 

14. How many men per thousand employed should an 
industry be allowed to kill each year? 

15. How can we balance cheapening of the process with 
shortening of the life of the workers? 

16. Can industry be made perfectly safe? 

17. Why not insure every one against accidents whether 
they take place in industry or not? 

18. How do epidemics affect the insurable risk in health 
insurance ? 

19. How would allowance be made for the differences in 
the healthfulness of localities? 

20. Should allowance be made for differences in the 
health of the insured at the time the insurance was taken 
out? 



Social Insurance 171 

21. Should we have compulsory health insurance for the 
whole population? for the poorer part of the population? 
If so, where would you draw the line? 

22. Why should the employer or the state pay any part 
of the cost of health insurance? 

23. What difhculty arises in connection with the choice 
of the doctor under health insurance? 

24. Can we predict the percentage of people who will be 
invalids in old age? 

25. Can we predict the percentage of people who will not 
be self-supporting in old age? 

26. How does a state old-age pension differ from charity ? 

27. Which system for providing for old age is better, the 
English or the German? Why? 

28. Which would be better, unemployment insurance or 
regularization of industry? 

29. Could there be a period of depression in industry, if 
all of the workers out of employment were getting unem- 
ployment benefits ? 

30. Who ultimately pays the cost of unemployment in- 
surance ? 

3 1 . Explain the Ghent system of unemployment benefits. 

32. What are the limitations of out-of-work benefits of 
trade-unions ? 

33. Why not pay out-of-work benefits to strikers? 

34. Discuss the proposal to have governments carry on 
public works in time of depression in order to give work to 
the unemployed. 



CHAPTER XI 

TRANSPORTATION 

I. The Place of Transportation in Economic Organization. 2. 
Stages of Development of Internal Transportation in the United States 
— Waterways— Roads — Canals^Railroads. 3. The Development of 
the Technic of Railroad Transportation — Locomotive — Rail — Cars — 
Safety Devices. 4. The Development of the Railroad Net in the 
United States— The Romance of the Railroad — The Darker Side — The 
New York Central — The Pennsylvania — The Baltimore and Ohio — 
The Union Pacific — Central Pacific. 5. Railroad Competition. 6. 
Railroad Rate Theories — Cost of Service — Distance — Value of Service 
— What the Traffic Will Bear. 7. Classification of Freight. 8. Rail- 
road Freight Tariffs — The Bill of Lading. 9. Passenger Service and 
Rates. 10. Present Inland Water Transportation. 11. Early Mer- 
chant Marine and the Reasons for Its Decay. 12. Coastwise Shipping. 
13. The War and Shipping. 14. The Panama Canal. 15. Exercises. 

I. The Place of Transportation in Economic Organiza- 
tion. — Transportation fits into the scheme of economic 
organization as the device by which the desirabilities of 
goods are increased by changing the place where the goods 
are located. Cheap transportation makes possible geo- 
graphical division of labor, illustrated in the United States 
by the production of cotton in the South, grain in the 
Middle West, manufactures in the East, and fruit on the 
Pacific coast. The importance of transportation is shown 
by a comparison of the conditions in the Ohio Valley be- 
fore and after the development of communication with the 
Atlantic coast. Before easy communication was estab- 
lished, the people in the Ohio V^alley had plenty to eat but 
all other phases of their existence were extremely crude. 
There was no use to produce more than could be consumed 
locally, for there was no market for the product. When 

172 



Transportation 173 

easy communication was established, the Ohio Valley grew 
rapidly in wealth and comfort. The products of the fertile 
lands could be exchanged for manufactures and other things 
desired. 

Again, the importance of transportation is shown by the 
complaint of the farmers of the Middle West in 192 1, that 
it was possible for a farmer in Argentina to put his grain 
in New York at a lower cost for the water haul than the 
farmer would have to pay on the railroads. 

Strikes and threatened strikes of railroad workers have 
impressed on the people who live in cities how utterly de- 
pendent they are, particularly for their food, on the smooth 
working of the transportation system. Even within a city, 
great discomfort may be caused if a heavy snow-storm 
hampers the operation of the ordinary means of trans- 
portation. 

The carrying of persons and mail is absolutely essential 
to the conduct of modern large-scale business. Also, people 
travel for pleasure. In the latter case, the railroad is sup- 
plying a direct want. 

2. Stages of Development of Internal Transportation in 
United States. — So far as internal transportation is con- 
cerned, we may recognize certain stages: (i) Natural water- 
ways and trails. (2) Roads and turnpikes. (3) Canals. 
(4) Railroads. 

Natural Waterways and Trails. — The Indians had de- 
veloped a technic of transportation which implied the use 
of such light canoes as could be carried around obstructions 
in the rivers and over the spaces between rivers or lakes. 
The Indians also had trails which led over mountains by 
the lowest passes and in general connected the water 
transportation system. The colonists followed and devel- 



174 Introduction to Economic Problems 

oped these trails. On the trails, goods were carried on 
pack-horses and the travellers rode horseback. 

Roads and Turnpikes. — The development of roads made 
possible the use of carts and wagons for the transporta- 
tion of goods and stage-coaches for the transportation of 
passengers. The difficulties of road-building were increased 
by the wooded nature of a large part of the country. Be- 
cause of the poverty of the governmental bodies, many of 
the improvements were made by private companies, who 
built turnpikes, as they were called, and reimbursed them- 
selves by charging toll. A fairly comprehensive system of 
stage-coaches developed. It was possible by this means to 
go from Boston to New Orleans. In general, the roads grew 
poorer as one went West or South. 

Canals and Canalized Rivers. — From the standpoint of 
power used, the canal in level country is an extremely 
efficient means for hauling freight. A team of mules can 
haul much more on a canal than they can on the best road. 
The speed is not great. There are, however, certain diffi- 
culties in the construction and operation of canals. To 
go up or down hill, locks are used. A lock has gates at 
both ends. If a boat is to be raised to a higher level, it 
goes into the lock, the lower gates are closed, and water 
is allowed to come in and raise the boat to the higher level. 
If a boat is to be lowered, it goes into the lock; at the high 
level the gates are closed behind it and the water is dis- 
charged until the boat reaches the lower level. The proc- 
ess is slow and expensive, so it is not feasible to build canals 
where there is much elevation to be overcome. Another 
difficulty has to do with the supply of water. There must 
be ample supply of water at the summit level. In many 
cases this difficulty is insurmountable. Perhaps the most 



Transportation 175 

serious objection to canals in our country is that in the 
North they freeze in winter and so must remain idle for 
a considerable part of the year. 

3. The Development of the Technic of Railroad Trans- 
portation. — A brief sketch of some of the main points in 
this development will help us understand better the eco- 
nomic problems of transportation. 

The Early Development of the Locomotive. — Many men 
worked on the problem of the application of steam to loco- 
motion. One of the difficulties was how to generate steam 
rapidly enough. An early French engine with a boiler 
built on the teakettle principle would run for a few min- 
utes and then be forced to stop to get up steam. This 
difficulty was overcome by using the multitubular boiler, 
which gives an extremely large heating surface. The use 
of the exhaust to furnish a forced draft helped in the use 
of the multitubular boiler. We may take 1829 as the date 
when the locomotive was perfected. In this year Stephen- 
son's Rocket made a little over 29 miles an hour. 

The Contrast between Europe and the United States. — In 
Europe the railroads were usually built between places 
where there was already in existence the traffic to be car- 
ried. In the United States, most of the roads were built 
ahead of the traffic. In Europe, the lines were usually care- 
fully planned to eliminate curves and grades. The assured 
traffic made it profitable to build permanently. In the 
United States, the roads were often built with many curves 
and grades because the aim was to put the road through as 
cheaply as possible. 

Development of the Rail.— One of the discoveries which 
seems most obvious to us now was that a smooth-wheeled 
engine could pull a train on a smooth track. Many of the 



176 Introduction to Economic Problems 

early experiments depended for traction upon cog-wheels 
or the like, such as some railroads which go up mountains 
now use. Iron and steel were expensive. So, some of the 
early roads ran on wooden beams with thin strips of iron 
nailed on the top for a wearing surface. The constant 
passage of trains would cause the strips to turn up at the 
ends. When a strip got high enough for the wheel to get 
under it, then it would come up through the floor of the 
car and make what the passengers called a "snake head." 
Some rails were cast in short sections and set in iron sockets. 
With the development in England of the puddling process 
and the rolling process, the iron rail became the most gen- 
erally used rail, first in the shape of an inverted U and 
finally the present form of an inverted T. The next big 
advance came with the introduction of the Bessemer proc- 
ess of making steel. This process made steel cheap enough 
to be used for rails. Still later, the open-hearth process 
made a better grade of steel for rails. As the equipment 
increased in weight there has been a corresponding increase 
in weight of the rail; so, on the roads of heaviest traffic 
the rails weigh 130 pounds to the yard. 

The Engine. — The engine has grown steadily in weight, 
speed, and carrying capacity. For a long time the passen- 
ger-engine had an arrangement of wheels ooOO. The 
large wheels were drivers. Increased speed was obtained 
by increasing the diameter of the drivers. Increased 
steaming capacity has been provided by bigger fire-boxes, 
longer boiler-tubes, higher pressure, superheaters, and fire- 
brick arches. With the use of steel coaches, which make a 
much heavier train, the typical passenger locomotive has 
this arrangement of wheels ooOOOo. The freight-loco- 
motives have increased still more in size. The largest ones 



Transportation 177 

are the Mallet articulated compounds. The engines are 
extremely long, and there are joints which permit the en- 
gine to go around curves. They are called compound be- 
cause they use the steam twice, once in high-pressure cylin- 
ders, and then in low-pressure cylinders. Many of the first 
locomotives used wood for fuel. For many years coal, 
mostly bituminous, has been the chief fuel. In the West, 
oil is used to some extent. 

The electric locomotive is used in two classes of situa- 
tions. First., in city terminals, especially where tunnels are 
used. Here safety and the absence of smoke are the prin- 
cipal reasons for using them. And second, in the moun- 
tains of the West where coal is scarce and water-power is 
abundant. Thus, a considerable section of the Chicago, 
Milwaukee and St. Paul has been electrified. In going 
down the mountains the motors act as dynamos and gen- 
erate current to pull other trains up the mountains. 

Passenger-Cars. — ^The first cars were patterned after the 
stage-coaches. Soon, the long car with the aisle in the 
middle developed. Numerous improvements have been 
made in the springs, the seats, the use of steel in place of 
wood. The oil-lamps have been replaced by compressed 
gas, and finally by electric light; the cars are heated by 
exhaust steam from the engine instead of by stoves. Ves- 
tibules make passage from car to car easy. Of the special 
cars developed, the sleeping-car is most important. It has 
made night travel feasible if not entirely comfortable. 
The chair-car, the parlor-car, the dining-car, the club-car, 
the observation-car have all done their part in making 
travel more luxurious. 

Freight-Cars. — The early freight-cars were patterned 
after wagons. Soon the double-truck car was developed. 



178 Introduction to Economic Problems 

Then came the steady increase in size. The cars have be- 
come specialized. There are open-top cars for handling 
coal, iron ore, and other coarse, bulky products. These 
are usually arranged with hoppers so that the load can be 
dumped by gravity. Box cars are used for hauling grain 
and general merchandise. There are special cars for haul- 
ing stock. The development of the refrigerator-car has 
had great effect on industry. It has made possible the 
concentration of the packing industry and the develop- 
ment of fruit-raising regions far from the consuming regions. 
Tank-cars are used for various liquids, principally oil. 
Flat cars are used for machinery and lumber. Steel has 
been used more and more, so that now practically all cars 
have steel underframes and many cars are made entirely 
of steel. 

In this country, we have developed the practice of han- 
dling, as far as possible, goods in bulk. This saves carrying 
the weight of a container. Also methods have been de- 
vised for quick loading and unloading. Cars of coal are 
dumped by machinery, just as a person might pour the 
water out of a cup. 

Safety Devices. — Besides the increased safety which comes 
from more substantial tracks and stronger equipment, the 
principal inventions have been in the perfection of brakes 
and signal systems. The air-brake makes it possible for 
the engineer to control from the cab the brakes on all of 
the cars of a long train. The latest improvement utilizes 
electric control of the air. The automatic block system 
aims to prevent two trains from trying to occupy the same 
strip of track at the same time. The telegraph and later 
the telephone have been used in despatching trains. These 
safety devices are important also because they make pos- 



Transportation 179 

sible greater speed and a fuller utilization of the facilities 
of the road. 

4. Development of the Railroad Net in the United States. 
— Perhaps the best way to get a general view is to take the 
number of miles of railroad at the various decades. 

MILES OF LINE IN THE UNITED STATES 
Year Miles 

1830 23 

1840 2,818 

1850 9,021 

i860 30,626 

1870 52,922 

1880 93,267 

1890 167,191 

1900 198,964 

1910 249,992 

1918 253,529 

Then, some significant dates may be given. The railroad 
reached Buffalo from New York in 1851; connection be- 
tween Philadelphia and Pittsburgh was made in 1852; 
Buffalo and Chicago were connected in 1853. The road 
from Pittsburgh reached Chicago in 1856. The connection 
with the Pacific coast was made in 1869. 

The railroad has been since about 1850 the dominant 
type of inland transportation in the United States. Before 
that time we had depended on natural waterways, roads, 
and canals. 

Indirectly, the Erie Canal is responsible for the private 
ownership of the railroads in the United States. The Erie 
Canal was wonderfully successful. It developed a series of 
cities along its banks. It stimulated the growth of New 
York City. Now this success was due to the physical 
features: (i) the Mohawk Valley gave access to the West 



180 Introduction to Economic Problems 

with the h)west summit level; and (2) the Great Lakes 
provided a means for collecting traffic to be sent by the 
canal . 

Other states, seeing the fortunate outcome of New York's 
experiment, wrongly concluded that all internal improve- 
ments, especially canals and railroads, which a state might 
undertake, would be profitable. So they entered into a 
vast programme of state development of transportation, 
at first canals, and later railroads. The money provided by 
the states was usually raised by selling bonds. In their 
optimism, the people supposed that the return from the 
enterprises would pay the interest on the bonds and repay 
the principal when it came due. Almost without exception, 
the enterprises were not successful. The financial burden 
upon the states caused by the failures resulted in many 
states putting in their constitution clauses saying that the 
state or any subdivision of the state should not invest in 
any industry. Long afterward, some of these clauses have 
kept cities from taking over the street-car systems. 

The federal government, according to the strict construc- 
tion of the United States Constitution then prevalent, had 
no power to engage in the development of transj)ortation. 

We may summarize by saying that at the time the rail- 
roads were coming in the federal government could not and 
the state governments (as a result of the disastrous ending 
of the projects induced by the success of the Erie Canal) 
would not provide the funds and take over the manage- 
ment of the railroads. Thus, private enterprises assumed 
the task. And so we may hold the Erie Canal responsible, 
to a considerable degree, for the outcome. 

The Romance of the Railroads. — There has always been 
something of romance and adventure about the develop- 



Transportation 181 

ment of railroads in the United States. To be a railroad 
man has been like running away to sea. Think of the mag- 
nificent faith involved in putting a railroad through un- 
settled country and picturing the farms and industries and 
cities that will spring up. What is more thrilling than the 
building of a railroad across the plains to California with 
Indians to fight and buffaloes to hunt? The bridging of 
streams, the tunnelling of mountains, and the like have 
given chance for adventurous achievement. 

The Darker Side.—^\it the building of our railroads in- 
volved more than romance. The charters and public aid 
were often obtained by bribery more or less direct. Many 
innocent investors lost their money through sharp financial 
practices. Some roads were utilized for speculative pur- 
poses rather than for the development of transportation. 
The building of the roads was often made the basis of 
fraudulent deals with insiders at the expense of the stock- 
holders. No one can be proud of that part of our railroad 
history which deals with the early development of the Erie 
Railroad and the scandals of the Credit Mobilier, the con- 
struction company used in building the Union Pacific. In 
connection with the Credit Mobilier a congressional com- 
mittee once made a wonderful report which amounted to 
saying that the men interested in that company had been 
guilty of bribing congressmen, but that no congressman had 
been bribed. 

The New York Central.— The New York Central is a 
type of railroad built up by consolidation. The Erie Canal 
had caused a growth of population in central New York. 
Many short lines were built between cities, starting in 
183 1 with a line between Albany and Schenectady. By 
1845 it was possible to go from Albany to Bufi"alo using 



18*2 Introduction to Economic Prohleyns 

cijfht (lilTcrcnt railroads not |)liysi(ally connected. In 1849 
the (ra(ks were connected. Jn 185^^ twelve lines l)etween 
Albany and lUiffalo were consolidated as the New York 
Central Railroad. Vanderhilt }j;()t hold of the Harlem Rail- 
road and the Hudson River Railroad, and in 1869 formed 
the New York Central and Hudson River Railroad. This 
gave the connection with New York City. West of Buf- 
falo, the railroad was interested in various lines giving con- 
nections with Chicago, St. Louis, Louisville, Cincinnati, 
and other cities. In 1914 a consolidation took place with 
the Lake Shore and Michigan Southern under the name the 
New York Central Railroad. 

The Pennsylvania Railroad. This road grew out of the 
Pennsylvania State System. The success of the Erie Canal 
brought j)rosperity to New York City. Philadelphia wished 
to get a share in the i)rohtable Western tratle. The 
mountains to be crossed made the project more dillicult 
than the building of the I'^rie Canal. The state of Penn- 
sylvania built a railroad from IMiiladelphia to Columbia. A 
canal was built from Columbia to llollidaysburg along the 
Susquehanna and Juniata Rivers. 'Phen came the most 
interesting feature. The mountains were crossed by a 
combination of railroads on the level stretches and in- 
clined planes on the slopes. By this means Johns- 
town was reached. From there to Pittsburgh a canal 
was used. 

The Pennsylvania Railroad built a railroad over the 
mountain. Later it bought the Pennsylvania State Sys- 
tem and utilized part of it. 

The Baltimore and Ohio. — This road was Baltunore's bid 
for the Western trade. Construction started in 1828. It 
reached Wheeling in 1853 •^-^^ Chicago in 1874. 



Transportation 183 

The Union Pacific-Central Pacific. — California had grown 
in population and importance as the result of the discov- 
ery of gold in 1848. Connection with the East was made 
by the long journey by water around Cape Horn or by 
way of Panama or by the long journey overland across 
the plains. The Civil War emphasized the isolation of 
California and prompted the building of the railroad. The 
government gave land grants and financial aid. 

5. Railroad Competition. — We may recognize three types 
of railroad competition, (i) Competition of routes. (2) 
Competition of facilities. (3) Competition of markets. 
Competition of routes is illustrated whenever there is more 
than one railroad between two given points. Thus, be- 
tween Chicago and New York it is possible to go by one of 
several railroads, and the different railroads compete with 
each other for the traffic. In the days before the regula- 
tion of railroad rates this competition was a source of 
much discrimination. 

Low rates were given in order to get the traffic away from 
competing railroads. Under the present rate system, the 
rates are usually the same irrespective of the route taken. 
So competition is now more frequently the form of com- 
petition of facilities. Ordinarily, students are probably 
more familiar with competition of facilities as it applies to 
passenger service. This may take the form of faster 
trains, finer equipment, or better meals. Then, the com- 
petition of markets is extremely interesting. Take, for 
example, the case of oranges in the United States; the two 
sources of supply are California and Florida. We may 
then say that the competition which the Pacific railroads 
meet in the freight rate on oranges comes from the fact that 
the oranges from California, in order to be marketed, must 



184 Introduction to Economic Problems 

be put into certain cities in the East and Middle West at 
a price which will enable them to compete with oranges 
which arc brought from Florida. 

6. Railroad Rate Theories. — Cost of Service. — The cost 
of the service seems at first sight to be a reasonable basis 
for railroad rates. The chief difficulty in applying it arises 
from the fact that most costs on the railroad are joint costs. 
The same tracks are used for passengers and freight. The 
same engine and crew may be carrying a thousand different 
shipments. It is possible to figure certain direct costs if a 
train-load is shipped; c. ^., train crew, coal, something for 
the use of the engine and cars. However, it is nearly im- 
possible to figure the cost of the track, the terminals, and 
the general ofiicers. If we are dealing with a single package 
in a car, the problem is still more complicated. This much 
may be conceded, that the added cost of carrying a ship- 
ment sets the lower limit for the rate. 

Distance Theories. — At bottom, these theories are based 
on the idea of cost. There are three forms: (a) The straight 
distance theory, that the rate should vary directly with the 
distance. This neglects the heavy terminal expense, (b) 
The tapering distance theory, in which the rate increases 
with the distance but less rapidly. A uniform terminal 
charge and a proportionate mileage charge give this effect. 
(c) The zone system, in which the rates are the same over 
considerable areas. This equalizes competitive conditions 
within the zone. 

77/e Value of the Service. — This may be measured by 
the difference in the value of the commodity at the two 
places. This is too one-sided to do for a full basis of 
rates, but it sets the upper limit to what the railroad 
can charge. 



Transportation 185 

What the Traffic Will Bear. — This phrase is often used to 
characterize the price pohcy of the monopolist. But in the 
case of the railroad, it is used primarily as a justification 
for low rates. The idea is to develop traffic. Each ship- 
ment must cover the added outlay it causes and contribute 
something to general expenses. If the commodity is cheap 
and bulky, it cannot be expected to contribute much per 
ton, but in the aggregate the amount contributed may be 
considerable. This is the theory actually followed by most 
railroad men in the United States. 

Most regulating commissions attempt to apply a cost of 
service or a distance theory. 

7. Classification of Freight. — When we consider the 
numerous articles which may be shipped by freight and 
the great number of places which may be the origin or 
destination of the shipment, we see how impossible it would 
be to have documents which quote the rates on each 
separate article from each separate place to every other 
place. In order to simplify the matter, the railroad com- 
panies have grouped articles shipped into classes. In or- 
der to find the rate charged on any article then, one first 
consults the classification. 

Some of the factors which enter into the determination 
of the classification of an article are given in a decision of 
the Interstate Commerce Commission, quoted by Ripley.^ 

"Whether commodities were crude, rough, or finished; 
liquid or dry; knocked down or set up; loose or in bulk; 
nested or in boxes, or otherwise packed; if vegetables, 
whether green or dry, desiccated or evaporated; the mar- 
ket value and shippers' representations as to their char- 
acter; the cost of service, length and direction of haul; the 

1 Railway Rates and Regulation, pp. 314-315. 



186 Introduction to Economic Problems 

season and manner of shipment; the space occupied and 
weight; whether in car-load or less-than-car-load lots; the 
volume of annual shipments to be calculated on; the sort 
of car required, whether flat, gondola, box, tank, or spe- 
cial; whether ice or heat must be furnished; the speed of 
trains necessary for perishable or otherwise rush goods; the 
risk of handling, either to the goods themselves or other 
property; the weights, actual and estimated; the carrier's 
risk or owner's release from damage or loss." 

On page 187 is given a section of a classification. 

The section is from Official Classification No. 42, effec- 
tive July I, 1914. L, C. L. means less than car-loads. 
C. L. means car-loads. The Official Classification holds for 
the territory north of the Ohio and Potomac Rivers and east 
of the Mississippi River. The Southern Classification holds 
for the territory south of the Ohio and Potomac Rivers 
and east of the Mississippi River. West of the Mississippi 
River, the Western Classification is used. This division of 
territory is only approximate. The question suggests it- 
self: Why have more than one classification? The neces- 
sity arises from the fact that the different sections of the 
country have specialized in production. In a producing 
section rates will be low because the article moves in com- 
paratively large quantities and the railroads wish to pro- 
mote production by low rates. In other sections of the 
country where the article is used in smaller quantities and 
in the form of a finished product, the railroads can and 
will charge higher rates. In the classifications, the lower 
numbers represent the higher rates. So, in the producing 
section, the article will be put in the higher-numbered class, 
and, in the consuming section, it will be put in the lower- 
numbered class. Much has been done toward making the 



M 



IMica: 

Sheet, in barrels or boxes 

Scrap, see Note: 

In bags 

In barrels or boxes 

In packages or in bulk, C. L., min. wt 
30,000 lbs ., 

Note. — Ratings on Scrap Mica apply on Mica 
which has value for grinding or pulverizing only. 

Ground or Pulverized: 

In bags 

In barrels or boxes 

In packages named, C. L., min. wt. 30,000 

lbs 

2Middlings : 

In sacks or bbls 

Min. wt. 35,000 lbs 

3IVIILK: 

4 Milk, Condensed or Evaporated (liquid) : 

In milk shipping cans, subject to rates and 
regulations of individual carriers. 

In glass or earthenware, packed in barrels 
or boxes 

In metal cans completely jacketed in metal 
or wooden jackets 

In metal cans in crates 

In metal cans in barrels or boxes 

In bulk in barrels 

In glass or earthenware, packed in barrels 
or boxes, in metal cans completely jack- 
eted in metal or wooden jackets, in metal 
cans in barrels, boxes or crates, or in 
buUc in barrels, C. L., min. wt. 36,000 lbs. 

5 Milk Food, other than Malted Milk: 

In glass or earthenware, packed in barrels 
or boxes 

In fibre or metal cans in boxes 

In packages named, C. L., min. wt. 30,000 
lbs 

6 Milk, Malted: 

In glass or earthenware, packed in barrels 
or boxes 

In fibre or metal cans in boxes 

In bulk in barrels 

In packages named, C. L., min. wt. 30,000 
lbs 



Subject to 

Uniform Bill of 

Lading Conditions 



L. C. L. 



C. L. 



187 



188 Infroductio7i fo Economic Problems 

rules uniform, and the three classifications are now avail- 
able in one book. But in such a large country with such 
diverse interests, entire uniformity is not to be expected. 

It will be noted that the classification varies with the 
way in which the articles are packed and the volume of the 
shipments. The minimum weight which will be taken at 
the car-load rate is subject to many disputes. The rail- 
roads wish it to be as high as possible to promote heavier 
loading of cars; the shippers want it as low as possible to 
enable them to get the low car-load classification on small 
shipments. 

We will suppose that we wish to ship two sacks of mid- 
dlings, each weighing loo pounds, from Cumberland, Mary- 
land, to Columbia, Pennsylvania. The middlings in that 
form will go fifth class. 

8. Railroad Freight Tariffs. — When one has found the 
classification of the article he desires to ship, the next 
thing is to find the rate charge for that class from the point 
of shipment to the destination. The book which has this 
information in it is called a freight tarifif. In general, there 
are two kinds of freight rates: those called commodity 
rates and those called class rates. The commodity rates 
are quoted on articles which move in large quantities, 
usually by car-load lots, and so ordinarily apply only to car- 
loads. The class rates include all of the articles shipped. 
That is, if an article which ordinarily has a commodity rate 
is shipped in less-than-car-load lots, the class rates would 
apply. 

The fundamental idea of a railroad is to charge a cer- 
tain rate, usually the highest rate which will enable the 
article to move in profitable volume. It is obvious that 
this rate may be afifected by the classification or the tariff. 



Tranfiportation 



189 



Local rales arc rates for traffic which does not go Ix'yond 
a single railroad. Through rates are rates which are charged 
when the traffic moves over more than one railroad. A 
certain amount of grouping of rates is found, usually in- 
duced by competition of various jobbing or manufacturing 
centres. Thus, the rates to the South from the Middle 
West are made by charging a certain amount to any one of 
a number of Ohio River crossings and adding a local from 
the Ohio River crossing to a point in the South. 

To return to our problem, a section of a local tariff on 
the Pennsylvania Railroad before the war is given l)elow: 



TO STATIONS 



Nob. 



1410 



1416 



NAMES 



Mouiitvillf!. .I'cnim. 



Coll 



FROM 
STATIONS 
NUMBERS 



f 1981 to 1989 inc. 
2001 to 2005 " 

2015 

2035 i<> 2037 inc. 

2053 

2057 u. 2076 iiKi, 
2082 

I 2145 lo 2192 inc. 



1981 
1983 I 
2001 f 

2015 

2035 lo 2037 'ik 
2053 lo 2062 " 
2072 lo 2082 " 
2145 to 2192 " 



1989 inc. 
2005 " 



RATES IN CENTS PER 
100 POUNDS 



CLASSES 



2 


3 


4 


6 


:<] 


2-1 


IR 


ITi 


■sz 


25 


)S 


If) 


.•i2 


2(1 


IH 


If. 


:{.{ 


2H 


1!» 


1(1 


•.ir> 


21) 


21 


IK 


;<7 


:j() 


21 


IK 


;ts 


■M) 


21 


IK 


32 


27 


18 


ir. 


:«) 


2:i 


17 


M 


:n 


24 


IK 


15 


.-{2 


2r, 


IH 


If) 


.•J2 


2(( 


IK 


ir, 


:i;{ 


2(1 


I'.l 


10 


:i5 


2',» 


21 


IK 


.•(7 


.'to 


21 


IH 


;i2 


27 


IH 


15 



Freight tariffs vary greatly in form and arrangenient. 
However, they all give information about the rates charged 
on certain classes or commodities between different places. 
In this particular one, we look uj) Cumberland, Maryland, 
in the index of origins and find that its number is 2192. 
Then we fin<l Columbia, Pennsylvania, in the list of des- 



190 Introduction to Economic Problems 

tinations. Here the fifth-class rate for 2192 or Cumber- 
land, is shown to be 15^. So our shipment would cost 30^. 

The details of the way the shipment is looked after do 
not interest us. But we are interested in the bill of lading. 
This paper is given to the shipper by the railroad when he 
has delivered the goods to the railroad. It serves as a re- 
ceipt for the goods and also the contract according to which 
the goods are transported. Our interest in the bill of lad- 
ing arises from its use as collateral security for bank loans. 
Frequently, in the shipment of staples such as cotton and 
grain, the seller draws a draft on the purchaser, attaches 
the bill of lading, and discounts the draft with his bank. 
The bank sends the papers to some bank in the city where 
the purchaser lives. This bank presents the draft for pay- 
ment, and will not surrender the bill of lading until the 
purchaser accepts or pays the draft. As the purchaser can- 
not get the goods without the bill of lading, it is good col- 
lateral security. 

A copy of a bill of lading is given on page 191. 

9. Passenger Service and Rates. — Except in New Eng- 
land, the railroads receive in general much less revenue 
from the passenger service than from the freight service. 

In European countries, the roads have developed numer- 
ous classes of service, with considerable variation in the 
equipment used. In part, this has come about as a result 
of the stratified condition of society. In this country, there 
has been less tendency to have different classes of service. 
However, certain of our arrangements give about the same 
effect. Thus, extra fares are charged on the fast trains, a 
surcharge is collected in addition to the Pullman fare from 
those who use sleeping-cars, and emigrants are carried at 
lower rates on slower trains with poorer equipment. Es- 



'Unlfonn Bill f>t T^rtlnt— AJop*i d bj rarrlora In Omolal Cliu-sifTirDllon territory cfCectlvo January 1, l91fl." 

THE LONG ISLAND RAILROAD COMPANY 

Shippers No.- 
Agents N6 



ORDER BILL OF LADING-ORIGINAL. 



BECEIT£D, subject to the olussiacutlons uud urlUs ia elect on the into ot Issue ol this Orlglual BUI ot Liidlub'. 

at 19 

from- 



-the property described below, In npp^reDt pood order, except as 
), markeu, coQslgDed and deBtined aa lodicated beluw, which said 



n, lieicla coQtaiued Uncluding conditiooa on back horeol) and which 



Railroad 

routtj to Bald doetin'ution. It is mutually agreed, as to each 
to dputi nation, and as to each party at any time Interosted !□ 
Btall bo auhjoct to all the oontlltioDS, whether printed or wrli 
are agreed to by tho ohippcr and accepted for nliDscK and hia fissiyua. 

The surrender of this Orlglnat ORDER Bill of Ladlnic properly Indorsed shall be required before the delivery of the property 
Inspection of property covered by this bill ot lading will not be permitted unless provided by law or unless permission Is Indorsed oi 
this original bill of lading or given in writing by the shipper. 



The' Rate of Freight Irom- 



to ORDER OF- 

Destination , — 



DESCRIPTION Cr ARTICLES AND SPECIE 



'"to bo Prepaid." 



to apply In propnyment 



Obarges Advanced ; 



191 



192 hitrodtiction to Economic Problems 

pecially for travel to California, there are two kinds of 
Pullman cars, standard and tourist. 

Passenger rates are usually on a mileage basis. The rate 
charged between two cities, served by more than one road, 
is set by the short line. If this were not so and a longer 
road attempted to charge a higher rate, it would not get 
any of the traffic. Excursion rates and commutation tickets 
illustrate cheap rates which result from carrying a large 
number of people at the same time. 

10. Present Inland Water Transportation. — Water trans- 
portation within the United States has declined in impor- 
tance with the development of the railroad. The biggest 
water-borne traffic is on the Great Lakes. Iron ore is 
shipped in large quantities from Minnesota, Wisconsin, 
and Michigan to the iron and steel producing regions of 
Illinois, Indiana, Ohio, and Pennsylvania. Coal from 
Ohio, West Virginia, and Pennsylvania is shipped to the 
northern lake ports. Considerable grain still moves from 
the West to the East by way of the lakes. In addition, 
there is a certain amount of miscellaneous freight carried. 

The Erie Canal has been rebuilt by the State of New 
York, but the volume of traffic carried is not great. The 
traffic on the rivers is of more importance. Considerable 
coal is carried on the Ohio River. The Hudson River is 
used particularly for building material. The lower Missis- 
sippi is used for general freight, especially cotton. 

11. Early Merchant Marine and the Reasons for Its 
Decay. — In the days of sailing-vessels, we possessed great 
advantages for ship-building. Good woods for hulls and 
masts and spars were found close to the coast. Our de- 
signers developed good types, especially the clipper. Our 
sailors were skilled and daring. As a result of this com- 



Transportation 



193 



bination of advantages, we ranked high as a shipping 
nation. 

The decline in our merchant marine came after the Civil 
War. To some extent, it was due to the development of 
the iron and steel steamship. England had an advantage 
in building these. Our iron and steel industry had not 
then surpassed England's. The Confederate privateers 
during the war destroyed some of the shipping and more 
was transferred to foreign registry. The table below gives 
some of the figures showing the decline and the recovery 
during and after the war: 



PERCENTAGES OF IMPORTS AND EXPORTS BY 
WATER CARRIED IN AMERICAN VESSELS i 



1877. 
1901 . 
1914. 

1915- 
1916. 



26.9 


1917 


8.2 


1918 


9-7 


1919 


14-3 


1920 


16.3 





.18.6 

.21 .9 

■36.4 
•430 



12. Coastwise Shipping. — Since 181 7, coastwise shipping 
has been reserved as a monopoly for American built and 
operated ships. The tonnage operated has been large; so, 
we have compared favorably with other nations in total 
tonnage owned even in the times when we had few ships 
engaged in foreign trade. General package freight has 
been carried from port to port. New England gets much 
of its coal by water carriers. Fruit and vegetables are 
brought from the South to the North on the coastwise 
vessels. 

13. The War and Shipping. — The great war probably 
marks the beginning of a new epoch on our merchant ma- 
rine. To meet Germany's submarine campaign, our gov- 

^ Statistical Abstract of U. S., 1920, p. 382. 



194 Introduction to Economic Problems 

ernment entered into a great programme of ship-building 
and ship operation. The ships were built as rapidly as 
possible, regardless of cost. The building campaign was 
successful. It did its part in convincing Germany of the 
uselessness of continuing the struggle. 

The sudden termination of the war left the government 
with many ships contracted for which were not completed. 
After a short period of prosperity, depression came and 
the demand for shipping fell off. The government organi- 
zation for operating the ships was not very efhcient. 

The following table indicates the changes caused by the 
war, the enormous increase in the shipping engaged in 
foreign trade, and the slight decline in the coastwise ton- 
nage : 

TOTAL TONNAGE OF SHIPS ENGAGED IN TRADE 
OF THE UNITED STATES' 



Foreign Trade 




Total 


Steam 


Tunc "^o. IQI4. 


1,066,288 
9,924,694 


720,609 
9.023,724 


June 30, 1920 




Coastwise 


June ^0, 1914 


6,818,363 
6,357.706 


4,688,240 
4.425.997 


June "^0, 1920 




« Statistical Abstract of U. S. 


1930, p. 368. 







As the result of the war, we have displaced Germany as 
the second shipping nation of the world. We are not very 
far behind the United Kingdom. The following table shows 
how the war affected the tonnage of various countries: 



Transportation 



195 



STEAM TONNAGE (MERCHANT SHIPS OF 100 TONS AND 
OVER) OWNED BY THE PRINCIPAL MARITIME COUN- 
TRIES IN JUNE, 1920, AS COMPARED WITH JUNE, 1914» 



Country 



Gross Tonnage 



Rank 



Gross Tonnage Rank 



United Kingdom 

United States (including 

Great Lakes) 

Japan 

France 

Italy 

Norway 

Holland 

Sweden 

Spain 

Denmark 

Russia 

Greece 

Brazil 

Germany 



18,110,653 

14.574,375 
2,995,878 
2,963,229 
2,118,429 
1,979,560 
1,773,392 
996,423 
937,280 

719,444 
509,564 
496,996 
475,224 
419,438 



2 
3 
4 
5 
6 

7 
8 

9 
10 
II 
12 
13 
14 



18,892,089 

4,330,078 

1,708,386 

1,922,286 

1,430,475 

1,957,353 

1,471,710 

1,015,364 

883,926 

770,430 

851,949 

820,861 

307,607 

5,134,720 



3 
6 

5 
8 

4 
7 

10 
II 

14 
12 

13 

16 

2 



Total for World 53,904,688 



45,403,877 



•Federal Reserve Bulletin, Feb., 1921, pp. 184, 186. 

14. The Panama Canal. — The World War came about 
the time the Canal was finished, so there has been no op- 
portunity to see what effect the Canal will have on the trade 

TRAFFIC THROUGH THE PANAMA CANAL^ 



Year Ending 

June 30 

1915 

1916 

1917 

1918 

1919 

1920 



Vessels 



Tons of Cargo 



1,072 


4,926,145 


760 


3,063,371 


1,806 


7,083,045 


2,068 


7,535,795 


2,028 


6,923,423 


2,478 


9,374,499 



10,212 



38,906,278 



' Statistical Abstract of U. S., 1920, p. 377. 



196 Introduction to Economic Problems 

routes of the world. It will make possible trade by water 
between the east and west coasts of the United States. It 
will shorten materially the distance from ports on the east 
coast of the United States to the west coast of South 
America. 

15. Exercises. — i. Indicate in as many ways as possible 
the importance of transportation to New York City. 

2. Discuss the influence of transportation on the loca- 
tion of factories and jobbing houses. 

3. Describe the contributions of the American Indians to 
the development of transportation. 

4. What is the objection to toll roads? 

5. Give the advantages and disadvantages of canals. 

6. Who benefits by the improvement of the Erie Canal? 

7. Show how the conditions in the United States influ- 
enced the type of railroad-building. 

8. Trace the development of the rail, the engine, and the 
cars. 

9. Give some account of special freight equipment and 
the methods of handling freight at terminals. 

10. Explain the block system for operating trains. 

11. What is the importance of the air-brake? 

12. Give several illustrations of competition of routes, 
facilities, and markets. 

13. Why is railroad competition severe? 

14. Explain historically wh}'^ we have private ownership 
of railroads in the United States. 

15. Why is freight classification necessary? 

16. What determines the class in which a commodity 
will be placed? 

17. Why is it difficult to get uniformity of classification 
in the dift'erent parts of the country ? 

18. What are commodity rates ? Why are they granted ? 

19. What is the importance of the bill of lading from the 
standpoint of the banker? 

20. What information is given in a freight tariff? 



TranspoHatioii 197 

21. State the various rate theories, test each from the 
standpoint of the interest of the railroads and the interest 
of the general business public. 

2 2. Outline the accounting problem in basing rates on 
cost. How would variations in volume of traflic affect cost ? 

23. Discuss railroad competition as it applies to passen- 
ger service. 

24. How will the automobile, the motor-truck, the trolley- 
car, the auto-bus, and the aeroplane affect the earnings of 
the railroads? 

25. Explain the basis for making commutation and ex- 
cursion rates. 

26. Why are not waterways developed by private enter- 
prise ? 

27. What canals are at present much used? 

28. When all costs, public and private, are considered, 
what sorts of water-carriage are efhcient? 

29. Why should coastwise shipping be reserved for 
American ships ? 

30. Compare the advantages and disadvantages for 
making and operating ships in the United States from 
1 790-1850 with those of the present day. 

3 1 . Why did the American merchant marine decline ? 

32. What is the advantage of having goods carried in 
American ships ? 

33. Recount briefly our experience with government 
operation of shipping during and after the war. 

34. Is the Panama Canal a paying proposition? 

35. What advantages to the trade of the United States 
will the Panama Canal bring? 



CHAPTKR XII 
GOVERNMENT RICGULATION OF RAILROADS 

I. The DtMiiand for RcKnI.Uioii OwiKMship versus Regulation — The 
Alleged Advantages — ICvils of (iovernnient Ownership. 2. The Scope 
of the Interstate* Commerce Act. 3. Powers of the Interstate Com- 
merce Commission. 4. Procedure. 5. The Regulation of Rates. 6. 

The I-ong and Short llaiii Clause. 7. The Commodities Clause. 8. 

Tlie Ajjplication of the Sherman Anti-Trust I-aw to Railroads. 9. Fed- 
eral and State Regulation of Interstate Commerce. 10. State Railroad 
Couunissions and Regulation. 11. The Railroads and the War. 12. 

The lOsch-Cunnnins Law The New Provisions About Rates. 13. 
Railroad Valuation ICarnings Original C'ost — Original Cost with De- 
[)reciation — C'ost of Rei)ro(Iiiction, New — Cost of Reproduction, Less 
l)ei)reciation — Capitalization —Market Value of Stocks and Bonds — 
The Problem of Railroad Land. 14. Kxercises. 

I. The Demand for Regulation. A study, in con.sider- 
ablc detail, of tlic course of government regulation of rail- 
roads is worth while, because we have in it the longest ex- 
perience of government regulation of any industry. The 
])r()l)lemsand diHiruIlies which have arisen in the regulation 
of railroads will probably attend any effort of the govern- 
ment (o extend regulation to other industries. But first 
we must consider the alternative to regulation. 

Owncrshij) versus Rcgulalion} — All but a few people ad- 
mit that transportation cannot be left entirely to private 
initiative. We have seen that our whole economic organiza- 
tion is dependent on ellicient transjiortation. Competition 
between carriers needs to be controlled both for the sake 
of the carriers and the public. The carriers need protec- 
tion because competition between railroads may be over- 

• CJ. fohnson and Van Metre, Principles of Railroad Transportation, 
chap. XXXII. 

198 



Government Regulation of Railroads 199 

severe. Since the railroads have such a large investment 
in fixed capital, slight variations in the volume of traffic 
may make a great difference in the net earnings. The fixed 
expenses go on, to a considerable extent, irrespective of 
traffic. From one point of view, the return from the added 
traffic would be mostly clear gain ; so it would be worth fight- 
ing for. The interest of the public is that the transporta- 
tion service shall be adequate at all times and that rates 
shall be reasonable and non-discriminatory. 

Two methods may be employed to remedy the evils of 
unrestrained competition. The government may own and 
operate the railroads, or it may regulate them. The selec- 
tion of the method should be on the basis of efficiency. The 
experience of other countries has only limited application 
to the United States. The area of the United States is so 
much greater and the mileage of railways so great (nearly 
one-half of the total in the world) that no country which 
has government ownership is really comparable. Again, 
matters of fundamental importance are the attitude of the 
people toward government enterprises and the degree of 
administrative efficiency by the government. These differ 
greatly from country to country. 

The Alleged Advantages. — The more enthusiastic advo- 
cates argue that government ownership will enable us to 
keep all the advantages of our present system and eliminate 
all of its evils. 

(i) They argue that the capital charge will be lessened, 
as watered stock will be eliminated and bonds on the credit 
of the government could be marketed at a much lower rate 
of interest. The assumption frequently was made that 
enough bonds could be sold at 2 to 3 per cent to buy all 
of the railroads. The experience of our government in 



200 / iilnxliiclion lo Fjconomic rrohlciiis 

sclliiij^ bonds diiriii/jj tiic war showed Ihc error in Uiis as- 
suniplion. 'Jlie amount of the war issues was only slightly 
more than the amount necessary to buy the railroads, yet 
the last issue, sold on a patriotic rather than a market basis, 
needed an interest rate of 4):( per cent. Some saving un- 
doubtedly could be made, but it would be much less than 
sometimes claimed. P^specially, if the government should 
now allempt lo add this great amount to its indebtedness. 

(2) The advocates of government ownership claim that 
all discrimination would be eliminated. Certainly, the dis- 
criminations which arise from conipetition would be elimi- 
nated. Those which are personal would, of course, still 
jiersisl. Another tyi)e of discriminalion might be fostered; 
an "agricultural bloc" might force through Congress laws 
directing the government-owned raih^oad to charge ex- 
tremely low rales on agricultural products. 

(0 Lower rates are held out as an inducement to have 
the government own the railroads. Here, it is necessary to 
make sure that the lower rates are not the result of shift- 
ing ])art of the costs to the public in the form of tax'cs or 
of failure to ])rovi(le adequate depreciation. Lower rates 
which do not result from increased efficiency are not de- 
sired. The question of elliciency is the whole point at 
issue. 

Evils of Government Owners hi p. -{i) Political action in 
location of railroads might lead to much needless expendi- 
ture. Our experience with rivers and harbors and public 
buildings is a national scandal. A railroad improvement 
bill of the same sort would mean uneconomic and wasteful 
building. 

(2) Man)' fear that government ownershi]) would deaden 
the incHMilixe for im])ro\('meiits. 'Hiey think that the mar- 



Government Regulation of Railroads 201 

vellous technical advances which we have made are the re- 
sult of the individual initiative which has been fostered by 
private ownership. They ask what incentive there would 
be for the manager to be efficient or to introduce improve- 
ments. 

(3) The labor problem would be serious. If we argue 
from the experience of the postal employees, we would say 
that the labor would not be overpaid. But one important 
element has been left out of that argument. The postal 
employees have never had strong unions. The better an- 
alogy is with what happened during the war. Some allow- 
ance must be made for the war emergency, but certainly 
the labor-unions were very successful in getting what they 
wanted in the way of increased wages and, what was really 
more important, national agreements about working rules 
and conditions. The discipline was weakened. The men 
felt that their advancement depended on union action 
rather than on the way they performed their work. 

With this brief survey of the leading arguments regard- 
ing government ownership, we turn to the development of 
regulation in the United States. The two reports to Con- 
gress of investigations concerning transportation condi- 
tions .shortly before the Act of 1887 are the Windom Re- 
port of 1874 and the CuUom Report, 1886. In the Win- 
dom Report, the burden of complaint was that rates were 
too high. The committee suggested competition to bring 
down rates. The government was to assist in the devel- 
opment of various waterways and to build a low-grade 
freight railroad from the Mississippi River to the Atlantic 
coast. By the time of the Cullom Report, the complaint 
had changed. The protest was against discriminations 
between places and persons. 



''ZiH / nlroductum In Fjcononiir f^rofdr/rns 

2. Tlie Scope of llio InterKtate Commcrco Act. Coii- 
gr(;SS huH Slcidily widclicti llir :,((t|)C (»l llir A(l. 'I'lic A( I 
of 1.SH7 provided lli.il railio.ids iiK hide l)ridj.';cs ;iii(l ferries 
.itid llial lraiis|)orl:ilioii iixliide all iiistniineiilalil ies of 
;;lii|)iiieii( or <arri;ij^{!. 'Ilic A( I applies l<t all (oniiiioii (ar- 
riers lruiisi)orlinK ])asseng(;r.s or ])ro])erly wholly by rail 
or by rail and water, and lo all (oiilinuous < arriaf<{; from 
oiu; slide lo anollier or lo a forei)';n (oiiiilry. TIk; Act 
ol !()()() exlended llic applii alioii lo sleepin)"; (ar (()ni|)anieH, 
express ( onipaiiies, and pipe lines. 'I'lie Act of i(;io nia(l(! 
inl(;rsla.le lel(!j',ra|)li, leleplione, and cable companies sub- 
je( I lo Hie A( 1. 

3. PowofH of the InterHtato Commerce Commission. 
The Act of 1HH7 ^ave the Interstate ('oMMner<c ( 'oniniission 
])ower lo incjiiire into llu; ntanaf^enienl of the business of 
all (arricrs subject to I he A< t, to re(|nire lesliniony and al- 
lendaiK'e of witnesses, to re(|iiire annual re|)orls, to jire 
:,( ribe nniiorni ac'conntin;^, and to administer oaths. In 
i.S()7, the sn|»reme (onri denied the power of the Interstate 
ConwnerK' ( 'omniission lo .set, ma.\inuMn rat(;s. After a 
lon^ |)eriod, in \()o(), ('on)i;ress j^ave them the rij.;ht lo fix, 
after investigation, a maxinunn rale to be ob.served in the 
future. 'J'hey also conid re(|iiire (omiet I in)'; lines lo thron)di 
routes with joint rates. In i()io, the powers of the Inter- 
state^ ('onnner((; Connnission were aj^ain exlended by per- 
niittinf; them lo establish lhrou)'h rail ronles or rail and 
water routes, even Ihou/^h a satisfactory thron^di route 
mi;.^ht exist; by K'vinj.^ them full jjowi-r lo initiate ])ro(("ed- 
inj.;s and by K'vin)'; them |)ower lo issue orders regarding 
any conditions or prai liccs re)';arde(l as unjnst or discrim- 
inatory. The power over classillcat ion was subse(|uenlly 
^ivcn. In the ranama Canal Act of 1912, it was pro\ ided 



Government Regulation of Railroads 203 

that railroiids should iioL own or liav(; an inU;r(!st in water 
carriers with which ihv.y might coin[)ete for traHic. Tlio 
Interstate Commerce Commission has a final decision as 
to the facts where coinix^titioii may exist. Except the 
water Hnes througii tlie ('anal, the Interstate Commerce 
Commission may allow ownership if its continuance would 
not prevent or reduce competition. The Interstate Com- 
merce (Commission may order a railroad, if it makes through 
arr;i,ng(;rnents with one water line to foreign countries at a 
j)ort, to make the same- with other water lines. In 1913, 
Congress ord(;red th(; Int(;rstate Connn(;rce Commission to 
mak(; a valuation of the railroads and to keej) it uj) to date. 

4. Procedure. When the original Interstate Commerce 
Act was before Congress, a difference of opinion arose as to 
how the Act should he (enforced. One group favored leaving 
the enforcement entirely to the courts. The other gnjuj), 
which finally prevailed, favored having a commission. So, 
the Act of 1887 provid(;d that the Interstate (Commerce 
Commission should hold hearings and make its decision. 
If the decision was not obeyed the commission ai)i)lied to 
the circuit court for an injunction to compel the railroad to 
obey. In 1889, in the Kentucky and Indiann, iJridge case 
(37 Fed. kep., 567), the court ailowc-d th(t introduction of 
new evidence. This was a blow lo the prestige of the com- 
mission, for it meant that the hearing before it would be 
merely a [)reliminary oik; arul that the real case would be 
Ijcfore the court. 

Congress, in 1889, gave the commission more ])ower. It 
could r(;f|uini witnesses or documentary evidence iron) any 
place in the United States and could itself sign the sub- 
poenas to require the attendance of witnesses. Again, in 
1891, Congress strengthened the authority of the commis- 



i-iOt J ninxlurlion to Economic PnMcuis 

sion l)y Kivinjj; il the ])<)W(T to secure testimony by depo- 
sition ;iii(l hy ])r()vi(lin!j; lii;il distriet attorneys nuist i)rose- 
cule cases on r((|n(sl ol the lonnnission. 

Al lirst the courts seemed to ham])er the commission 
wherever j)ossil)le. Later tliey acled juore favorably. In 

1892, in the case Counselnian v. Ilitdicock (142 U. S., 547), 
the suj^renie coinl held that tlie ( lause in (he law of 1889, 
])roviding that a witness should not be excused from testi- 
fying^ upon the claim that such test'mony mi)i;ht tend to 
incriminate him, was unconstitutional. Thereupon, in 

1893, C'onj^ress jj;ave absolute imnumity lor such testimony 
as niiji;ht incriminate the witness and made the penalty 
loi- relusinj^ to testily the same as lor other violations. 
This act was ui)hel(l by the su])reine court In i.S().| in the 
lirimson case (154 U. S., 447), whiih held that it was con- 
stitutional for (\)nj:;ress to |!;raiit to an administrative bod}' 
the power to com])eI the attendance and testimony of wit- 
nesses; and, in iS()(), in the ca.se lirown v. Walker (lOi U. S., 
591), which held that it did not violate the constitutional 
right of the witness to compel him to j^ive testimony. 

Man\ of the cases brought by the tommission dragged on 
f«)r many years by reason of the ap])eals and the crowded 
condition of the dockets of the courts. To improve this 
situation Congress passed, in ic)o.;, the Expediting Act. 
'The Act provided that in ecjuity suits in the circuit courts 
where the United Slates is the com])lainant under the In- 
terstate ("onunercc- or Anii Trust Acts, and where the 
allorney-gcncral certifies that the\' are of public im])or- 
tance, the suits shall be given i)referenc-e, and an early liear- 
ing b\' three* judges. Appeals are to be made direct to 
the supreme court, and made within sixtv days. 

'i'lie I'llkins Ail of 190J was concerned largely with re- 



Government Regulation of Railroads 205 

bates, and provided that the circuit court sitting in equity 
should enforce tariffs and prohibit discriminations. In the 
Hepburn Act of 1906, the courts were given additional 
powers of mandamus to enforce the orders of the Interstate 
Commerce Commission. Appeals were to be direct to 
the suprem? court with a privileged place on the docket. 
The attorney-general of the United States was to fight the 
appeals. 

In the Illinois Central case (215 U. S., 452), the supreme 
court laid down the principles which should guide it in 
considering the acts of the Interstate Commerce Commis- 
sion. The court questions only the constitutional right or 
power, and whether the administrative authority is within 
the scope of the delegated authority under which it pur- 
ports to have been made. It will not set aside orders 
merely on the court's conception of whether the power has 
been wisely exercised. 

The Mann-Elkins laws of 19 10 provided for a special 
commerce court of five judges which was to have exclusive 
jurisdiction in appeals from the decisions of the Interstate 
Commerce Commission. The law provided for easy ap- 
peal to the supreme court. It was thought that a special 
court would have the advantage of quickness, and that the 
judges would become specialists in transportation cases. 
However, the commerce court seemed to consider them- 
selves judges not so much of the law and procedure as the 
supreme court held in the Illinois Central case, but of the 
wisdom of the orders. The commerce court was abolished 
in 1913 and its duties assigned to the district courts. 

5. The Regulation of Rates. — Many practices of the rail- 
roads led to discrimination between shippers. Rebates 
were the most flagrant discriminations. The attitude of 



'<i()(t I ninxlurium to I'lcoinnnir /*n>hlrtns 

I lie |nil)li< Iow.ikI rcl).'il('S mIiows liovv our hiiniiicss sland- 
;it(l;; (|rvrl(>|>. 'I Ik- I'ch.ilc is :i kIuikI <>I p.irl of I lie .iiMolilil. 
p.'iid loi h.'iiispoi l.'ilioii, Of llic I i.'in .|)or l;il ion iii;iy he |>.-ii<| 
lor in lite lirst inHlancc .il .1 low*! i.ilc llciii oilier:; .ire |)<'iy- 
in);. 'l\\c rcl)jilcM were ol I wo kinds. I'irsl, lliosc wliicli 
wcic llic rcsiill ol" |)('rson;d f.ivorilisni. Very so<»n, ic:.cnl 
nirni .irosc over lliis ly|>c ol rclcilc. 'I'licrc vv.is .1 hclin)', 
lli.il I Ik- i.'iilro.'td, lliou)',li privately owned, should (real all 
shippers in (he s.anie maimer. A second lyj"' <'l rehale 
was one jdveii lo Ihe shipper who shippecl in laij^e (|iiaiili 
lies. I'or a loii)', lime nio.l people approved of Iliis typt; 
of rejtale. 'I'liev ai)',iied llial il was exinlly aiial()j,;()iiH lo 
Ihe piimiple Ihal wh()l<'sale prices are lower Ihan relaii. 
rile shin ol Ihe piiltlii lo Ihe view Ihal sik Ii reliales should 
iiol he allowed <aine as Ihe resiill ol ohservalion of Ihe 
ejfec Is of such advaiilafM'S in I raiisporlal i(Ui rales. 'Iran:; 
|)oi lalion i:i sik h an impoilaiil eleineiil in l>usin(\ss, Ihal Ihe 
liiiii Ihal paid lower rale:; ( oiild drive oiil il:; < oiiipel ilors. 
Now Ihe law in «'lfe( I says Ihal any one who (an :;liip a 
car load shall have as low a. rale as any one else. 

()|liei form:; of <li:,( 1 imiiial ion have al lime:; heeii u:.e(|. 
Shipmeiil;; have heen uiidei hilled ; Ihal i:;, (liar)/ed for less 
Ihan Ihe actual weifjit or le:;;; than Ihe ])roper ral<' (ol 
h'( led. Privately owned (oal, oil, refi ij'.eralor, and other 
kiiKls of car.s ha.V(r sometime;; heen ir.ed to di:.< liminate 
a^^•linst the ship|)er wIkmIocs not own any e(|uipineiit. 'ihe 
railroad may allow an excessive ainounl hir Ihe us(* of the 
cars. 

Some concerns ^ol the e(|uival(*nl of rebates l)y iiicor- 
poratiii).; a railroa<l (ompany to o|)erat(' the swit( hinj.i; lra( ks 
a I their jilanlH. 'riiese HwilchinK roads would then I'.et a, 
division of the rale on in and out hound :;liipmeiits. 



(Umcniiucid licf/idalion of lldilnnuh '207 

Sliorl lime larilTs wcmh^ oc.c.'isioiially used. A (aiilT 
would l)c filed K'vinf!j .i low rale for a short (iiiu;, Ouly 
the favored shii)iH'r would know of it and be al)le to take 
advantage of it. By the time his com])etitors were ready 
to shi]) under IIk; favorable ra,(e, it would Ix; withdrawn. 

One .slii|)|)er nii)!;lil be allowecl lime lo pay his frcij^ht 
l)ills and (he others be required to pay cash. This would 
auioiuit to ^iviuj:; hiui a lower rate. 

Sonietinu;s the; rebate; was eovered uj) by aiiollutr trans- 
action. The railroad might buy something from the con- 
cern and i)ay niorc; than the market price for it. 

lOxeessive allowance; for claims was an easy way (o con- 
C(;al the; r(;ba,l(;. 

'I'lu; lnl(;rs(a,l(; Coinnierce Act of i.S.Sy provided that. 
th(;re should be no discriniinalioii in ral(;s b(;tw(;en p(;rsons, 
])laces, or commodities; that, there; should be; no unelue; e)r 
unrease)nable; rates. The railroads must ])re'])a.re; and ])ul)- 
lish scheelule;s of rale-s and kee]) them for ]»nblic inspection 
and file e:o|)ie;s with Ihe; lulerslale; ('onuriere:e; ( 'omniisslon. 
I\ale;s e'.ould not be raised wilhout Icn days' notice. I'a,sse;s 
or r(;duce(l rates could be /^iven to I Ik- de^slitule; and (hose; 
having them in e:harge, to e;m])loye;e'S and their fainilie-s, 
unel to ministe;rs. The Act e)f i8<S9 re(|uir(;(l thr(;e; days' 
notice fe)r reielucing ra,t,e;s, anel ])roviel(;d that the; form e)f the; 
schedules should be prese :rib(;d by the lulerslale; ( 'oinnierce; 
(>)mmissie)n. In the e;arly rale; e;as(;s, wli(;n the; lnl(r:;late; 
Commere:e; ('e)mmissie)n found a rate unreasonable^, the;y 
specilieel the; maximum rale; whieh would Ix; reasonable. 
This ])ractie;e went unchange;el fe)r a time. I'inally, in iHc^y, 
in the Maximum Freight Ka,te ele;e;isie)n (167 U. S., /\']()), 
the suprerme court ele;e;iele;e| that the; Inle;rslate (lommerce; 
Conuuission could not enforce Ihe maxinnun rales on the 



^()»S I nlrodact Ion to Economic Problems 

railroads. This was a great l)low for freight regulation. 
I'"()r (■xain])le, if the rate charged was $r.20 ])er loo pounds, 
;iiid llu; Interstate ("oniniercc; Coniniission said tliat $1.00 
was the maximum reasonable rate, all it could do after this 
decision would be to say that the $1.20 was unreasonable. 
So, it might lake a great number of cases to bring down a 
rate to a r(!ally reasonable level. The Act of i(;oO laid 
lUiwn more detailed regulations about tiling, j)osting, and 
observing schedules, and re(|uired thirty days' notice for 
either an increase or a decreast; of rates. The Act of 1910 
aIlowc;d more ])eo])le to gc't ])asses, and ])rovi(l('(l that classi- 
lications as well as rates must be reasonable. 'J'he burden 
of ])roof for the reasonableness of advances was put on the 
railroads. This ])rovisi()n was extremely important. The 
Tnterstale Commerce Commission had been acting success- 
fully in removing discriminations which existed in rales, 
but had not been able to handle the matter of the general 
rate level so satisfactorily. When the burden of i)ro()f had 
been on the shippers, they found it almost impossible to 
convince lh(! Interstate Commerce Commission that the 
general level of rates was too high. Now the shoe is on 
the other fool and the railroads lind it almost impossible 
to convince the Interstate Commerce Commission that the 
general level of rates is too low. 

6. The Long and Short Haul Clause. One particular 
kind of discrimination between i)la(:es which caused a great 
amount of complaint was the charge of more for a short 
than for a long haul. The Act of uSSy provided that rail- 
roads were forbidden to make a greater charge for a 
short than for a long haul on the same line under sub- 
stantially similar circumstances and conditions. If, after 
investigation, the Interstate Commerce Commission found 



Government Regulation of Ra'droada !^()J) 

that the discrnnination was justiriable, it might give per- 
mission to the railroad to violate this clause. The lirst case 
which came before the Interstate Commerce Commission 
was the L. & N. case (i I. C. C. R., 31). In this decision 
the Interstate ('ominerce C'ommission decided that the 
dissimilar circumstances wiiich might justify the violation 
of the long and short haul clause were: firsl, water com- 
petition; second, competition of carriers not subject to the 
Act; and ihird, rare and peculiar cases. Of cour.se, this last 
clause acted as an invitation for the railroads to appeal 
every case on the ground that it was a rare and peculiar 
case. In 1892, in a lower court, a case was decided (52 I^'ed. 
Rej)., 912), which held that the joint line formed by two 
roads is wholly independent of the; two lines represented 
by the several roads taken separately and apart. This de- 
cision was overruled by the supreme court in 1896 in the 
Social Circle case (162 U. S., 184). The supreme court 
held that when a continuous line for through traffic is 
formed by several roads, the roads constituting the line 
and making use of it are merely parts of one through route 
and are not separate lines. In 1897, in the case I. C. C. 
V. Ala. Midland Railway (168 U. S., 144), the supreme court 
decided that railroad and trade competition created dis- 
similar circumstances and conditions. 1'his practically 
nullified the clause, since the discrimination arises ordinarily 
because of railroad and trade competition and the clause 
was intended to protect the cities from this particular 
working out of competition. In the Act of 1910, Congress 
attempted to strengthen the clause by eliminating the 
phrase "under substantially similar circumstances and con- 
ditions." The law ][)r<)vide(l that there sliould be no higher 
through rate than the sum of the local charges, and that a 



210 Introduction to Economic Problems 

rate lowered to meet water competition cannot be raised 
merely because the water competition has ceased. In 19 14, 
in the case of U. S. et al. v. A. T. & S. F. Ry. (234 U. S. 476), 
the supreme court held that the new section was constitu- 
tional, since Congress laid down in other parts of the Act 
the principles to govern its application; and, furthermore, 
it was held that the Interstate Commerce Commission 
might prescribe a percentage system in allowing deviations 
from the strict long and short haul clause. 

7. The Commodities Clause. — The Act of 1906 pro- 
hibits carriers from transporting commodities (except tim- 
ber) produced by them, or in which they have an interest 
direct or indirect. This was aimed primarily at the rail- 
roads which were interested in mining anthracite coal. 
Operators of independent mines claimed that rates were 
put so high that they could not make a profit. It was a 
matter of indifference to the railroad whether the profit 
was made on the mining or the carrying of the coal. In 
1909, in the case United States v. Delaware and Hudson 
Railroad (213 U. S., 257), the supreme court held that the 
clause was constitutional, but that a railroad owning the 
share capital of a coal company did not possess an interest 
direct or indirect in the coal mined. A railroad which is 
the legal owner of the coal at the mine might escape the 
interdiction of the law by selling the coal before the trans- 
portation began. This seemed to destroy the effectiveness 
of the clause; but, in 191 1, in the Lehigh Valley case (200 
U. S., 257), the supreme court held that it was illegal to 
use stock ownership for the purpose of destroying the en- 
tity of the producing corporation while its affairs and those 
of the railroad were administered in such a way as to make 
the two corporations virtually the same. 



Government Regulation of Railroads 211 

8. The Application of the Sherman Anti-Trust Law to 
Railroads. — The intense competition between railroads 
often resulted in rates which made traffic unprofitable. In 
order to control this competition, the railroads combined 
into pools. There were two types of pools, the traffic pool 
and the money pool. The traffic pool may be illustrated 
by the agreement, made in the seventies, between three 
railroads running between Chicago and Omaha. These 
railroads were of approximately equal strength, and the 
agreement was that each should get one-third of the traffic. 
In order to run a pool of this sort, some provision must be 
made for diverting traffic from one road to another in order 
to even the amount carried. In this case, the eveners were 
the shippers of live stock. 

A money pool means that earnings shall be divided in a 
certain percentage. In practice, the method was to allow 
the railroad to retain a certain percentage of the receipts 
to cover the bare cost of hauling the traffic. The amount 
in excess of this was turned into the common fund and 
divided among the railroads according to the agreed upon 
percentages. In some of the cases, these pools had been 
successful in maintaining peace between the competing rail- 
roads. The Act of 1887 prohibited railroads from pooHng 
or in any way dividing net earnings. 

After the pools were given up, the railroads attempted to 
get virtually the same result through rate agreements. 
Various freight associations were formed which practically 
set the freight rates in a given region. In 1897, a case was 
decided by the supreme court, U. S. v. Trans. Missouri 
Freight Assn. (166 U. S., 290), which held that the Sherman 
law applies to railroads whether the combination is reason- 
able or unreasonable and even in the absence of the intent 



212 Introduction to Economic Problems 

to restrain commerce. It is rather interesting that the 
Sherman law, which was supposed to regulate industrial 
combinations, should have been first used effectively 
against railroads which were supposed to have been regu- 
lated by the Interstate Commerce law. 

In 1898, in the case of the U. S. v. Joint Traffic Assn. 
(171 U. S., 505), the court again held that the activities of 
the traffic association violated the Sherman law and that 
it was no defense to say that the railroad rates established 
were reasonable. The fact of combination was sufficient 
to make the association illegal. In 1904, the Sherman Anti- 
Trust law was again called upon to suppress the practice 
which had grown up as a result of prohibition against pool- 
ing and traffic associations; namely, the practice of com- 
bining railroads. The case was the Northern Securities 
case (193 U. S., 197). The supreme court held that the 
Sherman law embraces all direct restriction of trade and 
every device for restraining commerce. The Northern 
Securities Company was a holding company with a state 
charter. The supreme court held that the state privilege 
of a holding company did not shelter it against congressional 
action. The court held that Congress has a right to pre- 
scribe the rule of free competition in interstate commerce, 
and to declare anything illegal which hinders it. In 191 2, 
the law was again utilized to break up the combination be- 
tween the Union Pacific and the Southern Pacific Railroads 
(226 U. S., 61). The supreme court decided that there 
was a combination of competing railroads and that such 
was against the law. 

9. Federal and State Regulation of Interstate Commerce. 
—One serious problem with respect to regulation in the 
United States arises from our form of government. The 



Govermnent Regulation of Railroads 213 

federal government has only such powers as are directly 
delegated to it by the Constitution, or as are implied in 
the delegation of other powers. The states have all of 
the powers not so given. The United States Constitution 
says, Section VIII: 

"The Congress shall have power to 

regulate commerce with foreign nations and among the 
several states and with the Indian tribes." 

Many disputes have arisen as to the precise spheres of 
regulation of the two governing bodies and the exact de- 
termination of what is interstate commerce. Some of the 
more important cases will be considered. 

Cases in Point. — A case in 1872 (Reading R. R. Co. v. 
Pa., 15 Wallace, 232) held that in the absence of federal 
regulation, state regulation might extend to such matters 
as bridges, dams, health, etc., but that the transportation 
of passengers or traffic between states is subject only to 
the federal government. Two cases 'n 1876 favored state 
regulation. 

Some Western States had passed laws regulating the rail- 
roads, some prescribing rates and some providing commis- 
sions with power to set rates. This legislation is called 
"Granger" legislation from the farmers' "Granges," local 
bodies of a society which grew up to promote the interests 
of the farmers. The railroads fought the legislation. It is 
interesting that the railroads were aligned against state 
control and denied the right of the states to regulate. One 
case (Munn v. Illinois, 94 U. S., 113) held that where the 
federal government had not regulated rates the states 
might do so; that states could control warehouse charges, 
though they were part of the instruments of interstate 
commerce; and that the state has the right to prescribe 



'Z\l / iiltnth(rh(>n In I'lroiinnnr /'rohlriNJt 



r/ilc!'. wImic IIic Ihi ■.iiic:,;; i:. Imiipjil willi |)iil»li( iiilcrt'!'.!. A 
ItiiitK li oi llic lsii)j;li".li ('oiiiiiioii Law liiid <I(viI(»|i(mI the 
l,MW ol I'dlilic Ciillin^rt. 'I'lirHd (•,(illliif<rt Imlu'lrd innhmp- 
orn, coniinoii (iirrirrw, < h Ilic Inw nd idtlli llml I hoy 
niiml r*<M'vr nil wIkmoiiic, willi ;Hl((|iiiilr Iim ililicst, ul rcimon 
(il»lc riilrn, willi MO (line limiiuilion 'I'lii;', dec JMioii (urioiiiilcd 
Id :t|t|)l yiti)', llir l.ilW ol I'lllilir ( ,1 llili|'.:'' lo I ;iilroii,(lH. 

'Hi.' !..m.imI (;i;(fl'ri(l'. V. ('. ."C N, W. Ky.,<M ''• f^M '^"l)» 
ill iM'/O, licjil lli;il iinlil ('oiip.i <•:;!■. iiii<lciliikcH lo Icj^IhIhIc 
on iiilciHliilc i.'ilc;, WincoMMlii limy icKiilnLn mlPM wifhin 
iIm' i'.IiiIc, fvrii lhoii)/,h mi( li icKuliilioii iiiny iiidinMlly 
iill(i| iiilc!'. oiilf'.idc ol llic hIiiI<'. 'I'lii!'. |)('Hiiil led the hIuIch 

10 develop II hiiilv I'.iilii'.lnc lory iiy'ilfni ol icf/iihilion, r;i( h 
ftliile ie|Mil,il ill)', llie |):iil ol llie li:iiil wlii< li w;i-. williili it^( 
own hordeiii. In iMJUi, however, ii new ni.e ( Wiihfr.li, clc, 
U \i Co-. •/» Illinois, I iH II S, v,'/) held lli;il iifilalo tould 

not K I' 1 1 Llie IIk |i;ii I ol ;ill llilei ,l,lle li:iul wlli( ll WIIH wilhlll 

nlale JMie!'.. 'rhir4 n<vri'He(| llie ide.i Ihiil ii Millie could 
lepiiliile inleiiiliile (oinineiM in Ihe nln'.eiKe ol fedenil 
lefMilalion, :ind WfiM one ol Mm iiii|i()rliiiil inlhieiK e:'. wliieli 
lid lo llie |);r'.",:ip,e ol llie liilei.lale ('oiiiliieiie A< I 
ol iMHy. 

In iH(/i, Ihe r',(o|M- ol ledeiiil iiiillioiily w.'i:t widened in 
Ihe :;o(iid Cinle » ;rie (ifij U. S., iH<)), wlii( h held lh;il 
when pood, iiie i.hipped on i\ ihroii^ji hill ol l;idin|'., I hey 
lon'.lilille Jin inlei'.liile nilliiip.e Hllhjei I lo ledeud .iiiper 
viuioii find (onlrol (''.veti II' it t'oiid were eiilirely williin 

11 nllile, il lie<:iiiii' |i:iil ol ;i i (iiil iniioii . line, nol liy (on 
Molidiil ion vvil h ol her ( oin|iiinie;;, hill l)\ I mIIk ;ii i .iii)',enienl:i 
lor (onlinnoii". (iiiiiiifV' or !'.hi|)inenl 

In Mji ly, Ihe ( onl lol ol I he ledeial ( oiii I", w.'f; ex I ended ill 
H rjlW" (I'.x |»;iile \'<»unj'., .'iig I' !i., t J >,) whi< h In Id lh:il 



(hwern/mr/nt Ilcf/iihdio'n of liiv'droad.H ^If* 

I Ik; federal tourls (;<)ul(l review sl.ile iiiiule rules lo S(;c 
wlielh(^r lliey were so low lli.'if. Iliey amounled to takin)^ 
properly willioul <liir prfxe;,:, o( l.iw, which is j)rohihiied 
in (he I'oiirreetil h Ameii(hii<iil lo Ihc ( 'onsliliilion of Iho 
United Slates. TJiis case, it is seen, does iiol depend on 
the rates being interHtate ratcH. It applies to rates on 
Inidic wholly within the Stale. 

The Minnesota Kale case (3,^ Suj). (It. Kejjorter, 'jm))^ 
in 1913, arose m connection with stale r.'i,l(!S ])rescril>ed by 
the state commission of Minnesota. 'IIk- ;,M|)r(iMe (oml 
h(;1d tii;i,l C'on;';res:; conlrols inlerstale connnercc, even 
tliouf^h by so doin;'; it inci<lenlally conlrols intrastate coni- 
mi'rce. 'I'he power of Congress is exclusive where the sub- 
ject re(juireH a general system or uniformity of regulation. 
In things admitting diversity of treatment ac((>rding to 
special loc;d re(|uirernenls, lire slates may act williin I heir 
respective jinisdictions until Congress sees lit lo .k I. I'.nt 
when (Congress acts, its aulhorily overrich^s .'dl <:onlli< ling 
slate legislation. There is no litnitalion on tlie slate con 
trol of intrastate rates because of a dormant power of 
Congress. Congress must really .'u.l. The po:,;,il)le <.on 
flicl might arise in two w.'iys: 

l''irsl, if a stale (;nfor(,ed exhcinejy low inlrjistale r;il(;s, 
the railro;i,d;, would he lor( ed lo ( h;i,rg<; higlicr rates on the 
iid,(;rst.'i,te hauls ;uid so the st.'dc would Ix; coidrolling the 
interstate rales. 'J'iie second conllicl is illustrated by tlie 
two cities at the head of the Gnsat I..'ikes, huluth, Minne- 
sota, jind Suj)erior, Wisconsin. Obvion.ly I he rates from 
these two pl.'i.ces to Minne.'ipf)lis nnist he tin; s;mie or all 
of the business would yo lo I he one whi( h h;i,d I he lower 
ral(r. II MiMMe;,ol;i, pre;,( rilxd .1. low r.ile lo hiiliilh, which 
is an intrastate haid, it virlti.iiiy would he ;,etlin|', the ral(; 



210 Introduction to Economic Problems 

to Superior, whidi is an interstate haul. lUit the court 
said in this case that Congress had not acted. 

The Shreveport cases (Houston E. & W. Texas Ry. Co. 
V. U. S., and Texas and Pacific Ry. v. U. S., 234 U. S., 342), 
in 1914, disclosed a case where Congress had acted. The 
Interstate (\)ninuMce y\ct ])rescril)e(l that rates should not 
discriminate between places. I'he supreme court held that 
if a state-made rate causes discrimination against an 
outsitle point, the power of Congress is supreme and Con- 
gress has acted so the intrastate rate must be changed. 
Many state railroad commissions had acted on the assump- 
tion that it was their function to get all the advantages 
l)ossible for the shipi)ers within the state. Thus, the pur- 
pose of the rates set by the Texas commission out of which 
this case grew was to promote the jobbing centres of Texas 
and hinder the development of jobbing centres outside 
of the state. The Interstate Commerce Commission, fol- 
lowing this decision of the supreme court, set rates from 
Shreveport, Louisiana, to Texas which indirectly set the 
state rates, since they were not allowed to discriminate 
against Shrevei)ort (41 I. C. C. R., 83). 

10. State Railroad Commissions and Regulation. In 
the preceding section, we have indicated the respective 
s])heres of state and federal regulation. There are two 
types of state railroad commissions, the strong and the 
weak. Massachusetts in 1869 had a commission. Its 
powers were merely advisory. After in\estigation it could 
make known its conclus'ons. It depended on public opin- 
ion to get its suggestions carrieci out. In 19 13, Massa- 
chusetts linally decided to have a commission of the other 
type. The Middle Western States were the iirst to have 
commissions of the strong type. The most important 



Government Regulation of Railroads 217 

power of these commissions was the power to fix rates. 
However, they have many other powers. They often re- 
quire trains to stop at certain stations; they can prescribe 
sanitary regulations. Some states either by direct legis- 
lation or through their commissions have attempted to 
prescribe classifications and rules about the size of car- 
load minimums. Before the war, many of the states 
had laws setting 2^5 a mile as the maximum rate for pas- 
sengers. 

The present tendency is for states to have public utility 
commissions. These are practically the old state railroad 
commissions, having the added task of looking after public 
utilities. 

In New York State there is a division of the field. The 
Public Service Commission for New York City consists of 
one member; the commission for the remainder of the state 
of five members. All are appointed by the governor with 
the advice and consent of the Senate. The term of office 
is five years. The commission can compel the attendance 
of witnesses and the giving of testimony. They have super- 
vision of railroads, street-railroads,- gas companies, electric- 
light companies, telephones, and telegraphs. These com- 
panies are required to make annual reports to the commis- 
sions in a prescribed form. 

The provision about railroad rates is that they must not 
be "unjust, unreasonable, unjustly discriminatory or un- 
duly preferential," nor "insufticient to yield reasonable 
compensation for the services rendered." The commis- 
sion is given the power to set rates and to see that "regula- 
tions, practices, equipment, appliances, or services" are 
"just, reasonable, safe, adequate, and proper." Specifically 
this means, for example, that they can order new tracks. 



218 Introduction to Economic Problems 

new tcTniin.ils, more trains, and set the times of starting 
trains. 

The ajjproval of the commissions is necessary for the 
issue of stocks and bonds. 

II. The Railroads and the War.— We have seen that 
during the war all the ener}i;ies of the i)eo])le were concen- 
trated on (he one task of winning the war. Of course, 
transi)()rtati()n was one of the most imj)ortant factors in the 
slruggle. In addition to the increased tralhc due to the 
manufacture and transportation of munitions of war, the 
railroads were called upon to move great bodies of men to 
trainingcamps and later to seaports to take ships for 
luMoix'. The first step was to try to unify the service and 
bring about co-operation between the roads. Here a 
strange situation was encountered. 'I'he ])olicy of regula- 
tion adopted by the United States had aimed to force the 
carriers to compete with each other. The railroads in 
their efforts to co-ordinate their activities were hampered 
by laws against agreements and combinations. After the 
declaration of war, the i)residents of the railroads met in 
Washington and perfected an organization called the Rail- 
roads' War Hoard. This board did much to ])romote the 
effective use of the railroads. Complete co-ordination was 
not possible. 

Another didiculty in the way of successful co-operation 
lay in the comj^etitive organization of the railroads. They 
were organized for profit. Complete unification of facili- 
ties would bring many difiicult problems. Frequently, 
one road had advantageously placed terminals. Should it 
allow other roads to use them? If so, on what terms? 
Perhaps the general interest would have been served by 
having one road carry nothing but low-grade freight. But 



Government Regulation of Railroads 219 

would the managers have been justified in accepting this 
task if by so doing the return to the stockholders would 
have been cut down ? 

An act passed August 26, 1916, gave the President power 
to take over the transportation system. Exercising this 
power, the President issued a proclamation December 26, 
191 7, taking over all of the systems of transportation in 
the country on December 28, 191 7. The secretary of the 
treasury, Mr. McAdoo, was made director-general of rail- 
roads. Mr. McAdoo turned back to their owners many 
small roads, called "short lines." He did not wish to make 
up deficits in their operation. The Federal Control Act 
was signed by the President on March 21, 1918. It pro- 
vided for the operation of the railroads for the war and a 
period not exceeding twenty-one months after the proclama- 
tion of the ratification of the treaty of peace. The roads 
were to get as compensation the average net operating in- 
come for the three-year period ending June 30, 191 7. 

The government agreed to return the roads and equip- 
ment in as good condition as they were when taken over. 

Mr. McAdoo at once raised freight rates 25 per cent and 
passenger fares to 3^ a mile, and state-made rates which 
conflicted were set aside. 

The war brought a truce in the conflict between the 
federal and state regulation. Since the government itself 
was setting rates, the state commissions refrained from in- 
terposing objections to any of the acts of the administra- 
tion. 

The wages of all classes of employees were raised, and 
the salaries of some of the higher officials cut. Wages were 
standardized over the whole country. At first, the operat- 
ing staffs of the railroads were not changed; later federal 



220 Introduction to Economic Problems 

managers were appointed. A regional plan of operation 
was adopted. At first there were three regions; finally, 
nine regions and districts. 

The government operated the railroads at a loss. The 
authorities did not think that it was wise to raise rates 
very high. Probably they were afraid that the addition to 
the cost of living would be unpopular. 

After the armistice, there arose a demand for a continua- 
tion of the governmental operation of the railroads. Vari- 
ous reasons were urged in support of this policy. Those 
who believed in government ownership thought that it 
might be a step in the direction of that policy. It was 
urged that it would ease the transition involved in recon- 
struction. 

On December 24, 1919, the President announced that 
the roads would be returned to their owners on March i, 
1920. Congress had presented to it many plans for rail- 
road control. The Railroad Administration proposed that 
federal control be continued until January i, 1924, and 
that combinations be made which would result in a com- 
paratively small number of strong companies. The Inter- 
state Commerce Commission suggested closer financial 
control, the permitting of united actions, and stricter regu- 
lation of service and equipment. The railroad executives 
advocated federal incorporation of railroads and a new 
member of the cabinet, to be called the secretary of trans- 
portation, who would see that the railroads got adequate 
rates. 

Railroad labor brought forward the Plumb plan. Under 
this plan the government would own all the railway prop- 
erties and turn them over to a single corporation to oper- 
ate, under a management representing the employees, the 



Government Regulation of Railroads 221 

operating officers, and the public. The profits were to be 
divided equally between the employees and the govern- 
ment. The security owners wished the roads to be returned; 
they advocated that regional commissions be set up in ad- 
dition to the Interstate Commerce Commission, and that 
legislation requiring rates adequate to yield a certain re- 
turn to the railroads be passed. The state railroad com- 
missions thought that they should have their former power 
and also new functions in connection with the Interstate 
Commerce Commission. The outcome of the situation 
was the passage of the comprehensive law now to be re- 
viewed. 

12. The Esch-Cummins Law. — The new bill, which be- 
came a law February 28, 1920, called the Esch-Cummins 
bill, contains many important provisions. 

{a) The roads were to be turned back to their owners 
March i, 1920. 

(6) Indebtedness of the roads to the government for 
betterments might be funded into 6 per cent bonds run- 
ning for ten years. 

(c) Rates could not be reduced before September i, 1920, 
without the approval of the Interstate Commerce Com- 
mission. 

{d) A railroad might agree to accept from the govern- 
ment a guarantee of earnings for six months equal to that 
guaranteed under federal control. Any excess would be- 
long to the government. 

(e) Loans might be made by the governm'ent to carriers 
at 6 per cent to run not over five years. 

(/ ) For labor disputes, two provisions are made. One is 
for voluntary adjustment boards, and the other for the 
Railroad Labor Board. This latter has three members rep- 



222 Iritrodmi'wn to Vlconmnic Prohlrm.s 

rcHcnliii)', llic cmiiloyccs, llircc i(|n('S(iiliiij', llic carriers, 
.•i.ii<l I hire i(|»r(s(nliiij'; llic |»iil)li(. 'llic hoard lias wide 
powers in slailiii)'; .iihI (oikIik liii}^ invest ij^at ions and se- 
lling dispiiles. No penally, liovvevcr, is provided for viola- 
tion of a decision ol llic Labor Hoard. 

(;;) Wages of llic employees of the carrier were not to be 
redn(cd before Seplcnibcr i, i()2o. 

(//) Ivalcs arc lo be :;cl wlii( li will yieM llie carriers 5^ 
or |>er cent on llicir properly. 

(/) The Inlcrslalc ('ommcrcc Coinniission is to report, 
on a. |»l.'iu loi iiici;',iii|^ llic i.iilio.Mls into a liniiled luinibcr 
of systems. II (an permit mergers and division of Irallic. 
or earnings if snc li are considered wise. 

(7) The eonunission can r(;(juire the joint use of termi- 
nals. 

(h) After ninety days the commission must a|)|)rove any 
extension or ab.indonmcnt of railroads. 

(/) After one hundred and IwcnIy days the (ommissioii 
must ;ippi(>\'e .ill secinity issues except notes maturing in 
nol over lvv(» ye.irs and to ai» ainonnl not j^reater than 5 
per (ciil of the securities oulsta.nclin|f. 

ini) The commission is j',i\'cn control ovc-r ciir service. 

(//) The" commission is increased to eleven members and 
their salaries made $i.»,ooo a year. 

77/c /Vcvr Provision About Rates. The problem of set- 
tin)', a i^iicial lc\(l of rates has always been a pu/,/liiig one. 
In a given rcj>,ion we lincl strong, well cc)nstru( ted, favor- 
ably located railroads, and weak and poorly constructed 
and unl.i\oiablv located ones. A rale lc\'cl which would 
l)ermil the latter to make expenses would biing big earn- 
ings to I he former. A r;ile aclc(|uate lo give the strong road 
iihuY return nught b;i.iikiupl the weak load. The new law 



(Uwernrrifmt Regulation of Railroads 228 

proviVlcs an ingctiious solution. The com mission may es- 
tablish groui)S and set a value on the railroad property. 
Each group as a whole shall have rates that will give a 
yearly return for two years of $}4 per cent (or 6 per cent 
if the commission so decides) on the value of the group as a 
whole. After two years the rate of return is left to the 
commission. If a carric-r mak(;s more than 6 per cent, one- 
half of the excess goes to a surplus fund unlil it is 5 per 
cent of the value of the pro|)erty, and one-half to the com- 
mission as a general contingent fund. After a niilroad has 
the 5 per cent surplus, it can do as it pleases with its share 
of the excess earnings. Some (|uestion tlu; constitutional- 
ity of this taking of earnings for the hen(;lit of other roa<ls. 
No doubt it will be tested as soon as some railroad has 
such excess earnings. 

13. Railroad Valuation. There are several reasons why 
a valuation of railroad property needs to be made. The 
two principal ones ar(; for the purpose of taxation and as a 
basis for n^gulating rates. Many mil roads arc; such big 
corporations that they are rarely bought and sold as a 
whole. Sometimes small railroads are so bought. More 
fre(|uently control is obtained by buying a certain amount 
of the stock. The conditions surrounding each road are 
so peculiar that we could scarcely say that there is a market 
price which could be taken as the fair value. The different 
methods of valuation for taxation will be discussed under 
corporation taxes. 

Railroads come under the Law of Public Callings and 
are required to charge reasonable rates. When the courts 
define reasonable rates, they say that they are rates which 
will permit the road to earn a reasonable return on ;i fair 
valuation of the property used. 'J'hus, we must find the 



224 Introduction to Economic Problems 

value of the property in order to determine the rate level. 
There are several proposed bases for valuat'on. 

Earnings. — The business man at once thinks of earn- 
ings as the true basis of value. Unfortunately, earnings 
will not serve to give us a valuation for rate-making, since 
they depend on the rates. To illustrate: if under a given 
level of rates a railroad has net earnings of $8,000,000 and 
the current rate of return on such investments is 8 per cent, 
we get a valuation of $100,000,000 for the road. The road 
makes 8 per cent on the valuation. But the road makes 
this return simply because we have capitalized the earn- 
ings at 8 per cent. No matter how large or small the earn- 
ings are, the result would be the same. Thus, any rate 
level, high or low, could be justified. 

Original Cost. — Many people say that the road should 
be allowed to earn on a valuation which represents the 
capital that was really invested in the road. With old 
roads this basis is wholly impracticable. The records are 
not available. Think of trying to find just how much 
money had been invested in the New York Central. Even 
if the records were available, there would be serious objec- 
tions to cost as a basis. We have seen in Turner's Intro- 
duction, page 179, that cost does not determine value. 

Many of the roads were built by construction companies 
which sold them to the railroad company for about double 
what they had cost. Why should roads be allowed to earn 
on a valuation which allows for wasteful and inefficient 
building? Why should they be allowed to capitalize their 
mistakes and perhaps their corruption ? 

Original Cost with Depreciation. — This is a slight improve- 
ment over the former basis. For, if the depreciation is 
fairly handled, many of the mistakes will be corrected. 



Government Regulation of Railroads 225 

However, it could not be made the basis for rate-making 
because of the lack of records for most of the railroads. 

Cost of Reproduction, New. — This method aims to de- 
termine the property a railroad owns and uses for trans- 
portation, and holds that such property is worth what it 
would cost to replace it. So far this seems fair enough. 
The application is not difficult in the case of engines, cars, 
most buildings, and bridges. There is considerable diffi- 
culty when it comes to roadway. Take a railroad which is 
crossed by several other roads. If it were to be rebuilt 
now, the material could be hauled on the roads and the 
work started at a number of different points. Perhaps the 
road when originally built was the first road in that part 
of the country and had to be built all from one end. Again, 
it is nearly impossible to tell just how much has been done 
in the way of cutting, filling, and grubbing. However, the 
chief defect is that no allowance is made for depreciation. 
The advocates of this method say that none is necessary 
because the owners keep the road in good state of repair 
so that it performs the same transportation service which 
a new road would perform. Indeed, they say that the 
service is better than a new road would give because the 
road-bed has settled, etc. Perhaps the analogy is not fair, 
but would a man pay as much for a two-year-old automo- 
bile as for a new one, even though it had been kept in good 
repair ? 

Cost of Reproduction, Less Depreciation. — This basis 
seems fairest if we are using valuation in the sense of what 
the road would sell for. There are still many difficulties, 
but they are not insuperable. 

There has been an interesting shift in altitude with regard 
to this basis. In the days after the Civil War down to 



226 Introduction to Economic Problems 

about 1896, general prices were declining and improve- 
ments were cheapening steel and railroad equipment. In 
this perod, shippers and state railroad commissions urged 
cost of reproduction, less depreciation, as the basis for 
valuation and the railroads opposed it. Since 1896 we 
have had in general rising prices, and now most of the 
railroads are in favor of cost of reproduction as the basis 
and most of the shippers and state railroad commission op- 
pose it. Each side advances the theory which will get the 
high or low valuation they desire. 

Capitalization. — ^A few people advocate capitalization; 
that is, the outstanding stocks and bonds as the basis of 
valuation. They evidently have a childlike faith in the 
numbers on the stock certificates. Contrary to the pop- 
ular notion, the objection to this method is not that most 
roads are overcapitalized but that they are undercapi- 
talized. There are, of course, cases of gross overcapitali- 
zation; and it would be very wrong to reward such over- 
capitalization by allowing large earnings, and to penalize 
the conservatively capitalized roads which had turned back 
their earn'ngs into improvements and had charged the 
improvements to operating expenses. 

Market Value of Stocks and Bonds. — This method would 
be better than the preceding one. It is, however, really 
only a variant of the earnings method. For the prices of 
the stocks and bonds depend on the earnings. In the case 
of small roads and old underlying issues of bonds, it would 
be difficult to get market quotations. 

The Problem of Railroad Land. — Many of the Western 
railroads were aided by land grants from the government. 
Through the public lands, the roads were given a right of 
way and alternate sections of the land for a number of 



Government Regulation of Railroads ^%1 

miles back from the road on both sides. The land over 
which the roads run has become valuable. Some people 
have argued that the roads should not be allowed to count 
the value of their right of way in making up their valuation 
since it had originally cost them nothing. In addition to 
the fact that it is present value and not cost in which we 
are interested, it seems fair to suppose that the land grant 
was given to encourage the building of the railroads earlier 
than they would otherwise have been built and that the 
public got their return through the development of the 
country. Some have said that the railroads should not 
have the benefit of the unearned increment. It may be 
urged that the railroads are really responsible for the in- 
crement in value, and even if they were not, so long as 
others enjoy the increment, the railroads should also en- 
joy it. 

14. Exercises. — i. Why is the study of government 
regulation of railroads important? 

2. What was the chief complaint at the time of the Win- 
dom Report? What was the theory back of the remedies 
proposed ? 

3. What was the chief complaint at the time of the Cul- 
lom Report ? 

4. What forms of transportation are now regulated by 
the Interstate Commerce Act? 

5. Why is water transportation less regulated? 

6. What is the distinction between regulation and man- 
agement? Do any of the powers of the Interstate Com- 
merce Commission amount to management? 

7. How do you explain the growth of the powers granted 
to the Interstate Commerce Commission? 

8. Make a list in general terms of the powers of the In- 
terstate Commerce Commission. 



228 Introduction to Economic Problems 

g. What advantage does enforcement of the law by the 
Interstate Commerce Commission have over enforcement 
by the courts? 

10. Recount the ways in which the courts hampered the 
Interstate Commerce Commission in enforcing the law. 

11. What is the attitude of the supreme court toward 
the orders of the Interstate Commerce Commission at the 
present time? 

12. Give the pros and cons of having a commerce court. 

13. What does the Interstate Commerce Act provide 
with reference to rates? What is the objection to rebates 
when large quantities are shipped? 

14. What is the importance of the provision about the 
burden of proof of the reasonableness of rates? 

15. Why are there such detailed requirements about the 
filing of tariffs? 

16. Explain why, for a long time, goods shipped to Reno, 
Nevada, paid a higher freight rate than the same goods 
shipped to San Francisco, California. 

17. What are the provisions of the present long and 
short haul clause? 

18. Why was the commodities clause put into the law? 
How has its enforcement been hampered? 

19. Explain how the different types of pools operated. 

20. Argue that if rates are regulated pools are desirable 
from the standpoint of the public. 

21. What have been the practical results of the use of 
the Sherman Anti-Trust Act against the railroads? 

22. Indicate broadly the spheres for state and federal 
regulation of transportation. 

23. What does the law require of public callings? 

24. When does a business become a public calling? 

25. Explain how the federal courts get their jurisdiction 
over intrastate rates. 

26. How can the Interstate Commerce Commission 
really control intrastate rates? 



Government Regulation of Railroads 229 

27. Leaving aside the question of constitutionality, 
which seems preferable, state or federal regulation of rates ? 

28. Indicate how the early Massachusetts State Railroad 
Commission got results and the special conditions which 
enabled them to do so. 

29. What were the important powers of the Western 
state railroad commission? 

30. What evils have resulted from the activities of the 
state railroad commission? 

31. What difficulties did the railroads encounter in their 
efforts to co-operate during the war? 

32. What return did the government give to the owners 
of the railroads for the use of them ? 

33. Discuss the wisdom of raising railroad wages more 
than railroad rates. 

34. Outline the various proposals for railroad control 
submitted to Congress. 

35. Explain carefully the provisions of the Esch-Cum- 
mins law with reference to rates and labor conditions. 

36. Discuss the following bases for valuation of railroads: 
original cost, original cost less depreciation, cost of repro- 
duction, new, cost of reproduction less depreciation, and 
earning power. 

37. On the basis of our experience with the regulation of 
railroads, outline the probable course of an attempt by the 
goverriment to regulate the price of trust-controlled goods. 



CHAPTER XIII 
UNFAIR COMPETITION 

I. What Is Competition ? 2. What Is Unfair Competition ? 3. The 
Federal Trade Commission and Unfair Competition. 4. c. Deceiving 
the Consumer. 5. b. Coercing Middlemen. 6. c. Injuring Compet- 
itors. 7. d. Misuse of Government Protection and Public Utilities. 
8. Exercises. 

This chapter illustrates the economic problems which 
arise in connection with the fundamentals of our present 
economic order. It also aims to prepare for the discus- 
sion of trusts. 

I. What Is Competition? — Competition has been called 
"the life of trade." The competitive system, the organiza- 
tion of economic life on the basis of individual initiative, 
has been denounced particularly by the socialists. Ob- 
viously, those favoring and those opposing competition 
must have their thought on different aspects of competition. 
Competition in its essence is striving to win. Those who 
oppose competition fail to see that the means employed to 
win are subject to what we may call the "rules of the 
game." The analogy to sport is instructive. Perhaps foot- 
ball is the most strenuous game. The players on each side 
strive to win, but their activities are limited by two codes: 
first, the rules as laid down by the official bodies; second, 
what is commonly called good sportsmanship. The dis- 
tinction between hard playing and "dirty" playing is 
clearly recognized. The standards of sportsmanship vary 
in different contests. We expect better spirit between two 
college teams than between two teams of "muckers" on 
the town lots. In business we find competition controlled 

230 



Unfair Competition 231 

partly by law and partly by the "public opinion" of the 
group. This "public opinion" is sometimes specifically 
formulated in a code of ethics, as in the case of medical 
associations for the doctors, bar associations for the lawyers, 
and underwriters' associations for the insurahce agents. 
Usually it is not so formulated, and the code is an un- 
written but none the less ejffective general opinion as to the 
t3^es of things which are fair or unfair in the matter of 
competition in the particular industry or trade. 

2. What Is Unfair Competition? — The general principles 
back of the objections to certain acts and the branding 
them as unfair will usually be found to be (a) that they in- 
jure the competitor, and (b) that they prevent the most 
efficient producer or trader from winning. In either case, 
the general public welfare is threatened. 

These principles are closely related. Dynamite applied 
to a competitor would be condemned both because of in- 
jury to the competitor and because there is no assurance 
that the undynamited firm is the efficient one. The public 
is interested in having the most efficient producer or mer- 
chant serve it. So the public opposes any practice, and 
calls it "unfair," if it hinders the working of the efficient 
and promotes the inefficient, or if it prevents competition 
from working and gives monopoly a chance. 

3. The Federal Trade Commission and Unfair Com- 
petition. — The act creating the Federal Trade Commission 
declared that "unfair methods of competition are unlaw- 
ful." The Clayton Act mentioned some specific practices 
as being unfair; namely, certain 

(i) Price discriminations; thus the Standard Oil Com- 
pany used to sell at high prices where there was no com- 
petition and at low prices where there was competition. 



232 Introduction to Economic Problems 

(2) Tying contracts; the Eastman Kodak Company used 
to require dealers who wished to handle their goods not to 
handle the goods of competitors. 

(3) Intercorporate stockholdings to limit competition; 
this was a common device among the railroads. The Penn- 
sylvania Railroad, at one time, held considerable stock in 
the Baltimore and Ohio Railroad, a competing line. 

(4) Interlocking directorates to limit competition; here 
again the railroads show many instances. The Great 
Northern Railway and the Northern Pacific Railway had 
common directors, though they are competing lines. 

An interesting part of the activities of the Federal Trade 
Commission has been the consideration of the trade prac- 
tices. Sometimes complaint is made to the commission 
of some specific practice. A hearing follows and a decision. 
Sometimes the commission calls together representatives 
of the entire industry and asks them to state in concrete 
form the practices which are unfair. The commission is not 
bound by the report but presumably gives it great weight. 
In the report for the year ending June 30, 1921, it is stated 
that such conferences were held in the creamery, rebuilt type- 
writer, pyroxylin plastic, macaroni, and butter industries. 

In the same report (pages 56-57), the commission lists the 
methods of competition which it condemns. We may give 
the substance of the various practices and attempt a classi- 
fication. It is obvious that some of the practices might 
well be put under more than one classification, but they are 
put in the classification which seems to cover best their 
primary aim or effect. 

4. (a) Deceiving the Consumer. — The fabric may be 
misbranded, as mercerized cotton sold for silk, and part 
wool sold for all wool. 



Unfair Com/petition 233 

The quality may be incorrectly marked as selling "off 
sugar" as standard granulated. 

Celluloid may be sold as ivory, tortoise-shell, or amber. 

The source of supply may be falsely suggested: paper 
made in the United States sold as if made abroad; Japanese 
safety-matches packed to look like Swedish matches. 

Adulterations are sold for the pure article. False and 
misleading advertisements are used. A company adver- 
tised phonographs alleged to have been sold by a storage 
company for charges, when they had not been so. A list 
of groceries was advertised as being a great reduction, while 
what was lost on the well-known goods was made up on 
the less well known. 

The goods of one manufacturer are passed off for the 
goods of another. This is done by making the firm name 
similar, as Goodwear Tire and Tube Company for Good- 
year Tire and Rubber Company. The product and adver- 
tising are often copied. 

False statements are made in advertising stock of cor- 
porations for sale; all are familiar with the wonderful oil- 
wells possessed by new oil companies. Rebuilt type- 
writers are sold for new. Old motion -pictures slightly 
changed are sold as new. 

Some concerns claim to be selling goods at a profit when 
they are sold at cost, in order to discredit their competi- 
tors. 

Premiums of unequal value are sometimes given, thus 
in effect conducting a lottery. Big packages, partly filled, 
are used to make the consumer think he is getting a large 
quantity. 

Packages of other than standard weight are used, and 
the consumer thinks he is getting more than he does get. 



234 Introdnction to Economic Problems 

5. {b) Coercing Middlemen. — To quote the commission 
for one case: "Trade boycotts or combinations of traders 
to prevent certain wholesale or retail dealers or certain 
classes of such dealers from procuring goods." The situa- 
tion here is that some dealers are irregular usually because 
they sell direct to consumers instead of to retailers. Some- 
times the refusal is to sell to chain stores or mail-order 
houses. 

During the war an interesting case arose. A film com- 
pany made false charges of disloyalty to the government 
against those who would not show its picture "Mothers 
of Liberty." 

In one of its aspects resale price maintenance comes 
under this classification. The manufacturer insists that 
the retailer sell the article at a certain price. 

6. {c) Injuring Competitors. — 

(i) Competitors' goods: Many false statements are used 
alleging that the goods are defective. 

Sometimes competitors' goods arc put up for comparison 
with the sellers' product and wilfully injured so they will not 
give a fair test. The salesmen of a cash-register company 
were accused of tampering with their competitors' goods. 

A baking-powder company saj's that its competitors' 
powders contain alum and that alum is injurious. 

(2) Competitors' good name: Besides general abuse, false 
statements are sometimes made to injure the credit of 
concerns. 

(3) Competitors' organization and operations: Concerns 
sometimes try to get employees of their competitors to 
violate their contracts and sometimes they try to break 
up the organization of their competitors by inducing a 
great many of their emplo}ees to leave at one time. 



Unfair Competition 235 

By espionage and bribery, they try to get the trade secrets 
of a rival. They wish to appropriate the results of the 
ingenuity and labor of their competitors. Thus, a music- 
roll company did not, at great expense, make master rolls 
but merely copied its rolls from the rolls of another com- 
pany. 

A yeast company took away the experts from a rival 
company. 

A scrap-iron company took scrap consigned to another 
company. This case appears to be ordinary theft rather 
than unfair competition. 

(4) Hindering the buying and selling of competitors : One 
concern will prevent another from selling to a firm by 
bribing the buyer of that firm, by commissions or presents, 

A yeast company was accused of making large contri- 
butions to bakers' associations to hinder others from get- 
ting business. Agents often, by misrepresentation, get 
customers to break the contracts made with a competitor. 

Sometimes firms, by misrepresentation, prevent their 
competitors from getting advertising space. 

Mail-order houses are harassed by requests for estimates 
and catalogues, especially those selling lumber and mill- 
work by mail. 

Big concerns sometimes bid up the price of raw materials 
in a locality to prevent the small local manufacturer from 
getting material to work with, 

(5) Practices aiming at, or resulting in, monopoly: Goods 
are sometimes given away to hamper small competitors. 

In the oil business, especially, equipment is loaned or 
sold at cost or leased for a nominal sum if it will be used 
only to distribute the product of one company. 

Concealed subsidiaries are used, "bogus independents" 



236 Introduction to Economic Problems 

they are often called. The Standard Oil Company and 
the American Tobacco Company used many such inde- 
pendents. 

Goods are sold with agreements as to the price at which 
they are to be resold. 

7. (</) Misuse of Government Protection and Public 
Utilities. — Railroad rebates used to be a common form of 
unfair competition. The Federal Trade Commission does 
not mention them, for the Interstate Commerce Commis- 
sion has jurisdiction in such cases. 

The Federal Trade Commission does prohibit the prac- 
tice of using agents of common carriers, as did one creamery 
company, to solicit business, and the practice of getting 
the names of competitor's customers from railroad agents. 

The patent has been a fertile source of unfair methods 
of competition. Many of the tying contracts are based 
on a patented article. Thus the mimeograph patent was 
made the basis of an agreement to use in its operation only 
the supplies purchased from the company that made the 
mimeograph. Also many of the resale price agreements 
were in the form of a license to use a patented article. 
Thus, the Victor Company aimed to control the price of the 
Victrola and the Victrola records. Threats of suits claim- 
ing violation of patents are common. Some concerns make 
false claims that they have patents covering some article 
and attempt to prevent others from making or selling the 
article. 

8. Exercises. — i. Discuss the analogy between competi- 
tion in business and the "struggle for existence" among 
animals. 

2. Give some of the items in the code of ethics of doctors, 
lawyers, or insurance agents. 



Unfair Competition 237 

3 . Is the aim of such codes of ethics to protect the public 
or the members of the association? 

4. From the standpoint of the low-price town, is there 
any objection to price discrimination? 

5. Under what conditions is a tying contract effective? 

6. Give instances where intercorporate stockholdings 
might limit competition. 

7. Give instances where you consider interlocking direc- 
torates desirable. 

8. Why not have all goods tested and certified to by 
public authority ? 

9. If a fabric look like silk, why not call it silk? 

10. What interest has the public in preventing the co- 
ercion of middlemen ? 

11. Has a company a property right in its organization 
which the courts should protect? 

12. From the standpoint of the public, what is the ob- 
jection to the practice of the buyer for a firm receiving 
direct or indirect commissions from the dealers from which 
he buys? 

13. Argue for and against resale price maintenance. 

14. Why should not the agents for common carriers be 
allowed to solicit business for particular firms ? 



CHAPTER XIV 
THE TRUST PROBLEM 

I. What Is a Trust? 2. Causes for the Growth of Trusts. 3. Minor 
Causes for the Growth of Trusts. 4. The Common Law About Com- 
binations. 5. Forms of Combination. 6. Pools. 7. The Trust in the 
Legal Sense. 8. The Holding Company. 9. The Merger or Amalga- 
mation. 10. The American Tobacco Company. 11. Exercises. 

1. What Is a Trust? — The word trust, as applied to busi- 
ness organization, originated in the use of a legal device to 
cITect combination. This device will be described later, 
'['he public then applied the word to all combinations in 
industry, whatever the form of organization. And now 
finally it is applied to large businesses, whether they are 
combinations or not. In the use of the word, there is always 
the idea that the business is dominant in its line, particu- 
larly that it has enough control to have considerable influ- 
ence on prices. Public utilities, even though they arise 
from combinations, are not usually called trusts. 

2. Causes for the Growth of Trusts.^In other places 
consideration has been given to the advantages of large- 
scale production,^ the gains which are possible from mo- 
nopoly,^ and the unfair methods of competition^ which have 
been used against competitors. These arc the primary or 
underlying causes for the growth of trusts. The Industrial 
Revolution brought in a new technic of manufacture, which 
by the use of power machinery greatly increased produc- 
tion; and a new technic of transportation, which made 
possible an almost indefinite widening of the market. As 

• Turner's Introduction, chap. XXV. - Ibid., chap. XXVI. 

"Chap. XIII of this book. 

238 



The Trust Problem 239 

the business units grew in size, competition became more 
fierce; so, attempts were made to eliminate, by combina- 
tion, the losses sustained in this competition. And by- 
using certain unfair methods of competition, combinations 
were able to strengthen their hold on the industry or per- 
haps get a complete monopoly. 

3. Minor Causes of the Growth of Trusts. — In addition 
to the primary or underlying causes, there are other causes 
which contributed to the growth of certain trusts. 

Profits in Promotion. — From 1898 to 1901, there was a 
veritable craze for the promotion of trusts. Certain men 
perfected plans for combination. The public seemed to 
have an insatiable desire to invest in the securities of trusts. 
Because of the rivalry and bitterness of the competitors, 
frequently an outside promoter could bring about an agree- 
ment more easily than any one directly connected with the 
industry. For his services, the promoter was richly re- 
warded. So, often, the initiative for the formation of the 
trust came from a promoter who thought that he saw a 
chance for profit. 

The Tarif. — Mr. Havemeyer, who was interested in the 
early sugar trust, once said that the protective tariff was 
the mother of the trusts. Most students of the question 
would not agree with him. Great Britain, with a purely 
revenue tariff, has had a development of trusts. However, 
the tariff may have some influence. It narrows the field 
of competition and gives the home market to the trust to 
exploit. Again, a protective tariff may lead to an over- 
expansion of an industry and so cause intense competition 
and finally a combination. Probably the tin-plate com- 
bination can be traced fairly directly to the McKinley 
tariff bill of 1890. 



240 Introduction to Economic Problems 

Railroad Rebates. — -Favors from railroads undoubtedly 
helped some trusts to grow. The Standard Oil Company 
made effective use of this device for getting the better of 
its competitors. With stricter governmental control, direct 
rebates have disappeared. 

Patents. — At times, patents have been used as the basis, 
both of the combination and of the fight on outsiders. 
Thus, the bathtub trust was held together by a system of 
licenses to use patents covering the process of putting on 
the enamel. Threats of suits for alleged infringement of 
patents have been a common method of unfair competition. 

4. The Common Law Concerning Combinations. — The 
English common law is the law which comes from precedent, 
not from the act of a legislative body. The early rule was 
that all contracts in restraint of trade were void. Later, the 
rigor of the rule was relaxed, and certain contracts in re- 
straint of trade were held to be reasonable and enforceable. 
The interests of both the public and the parties to the 
contract must be considered. A typical contract has to 
do with the sale of a business with the agreement not to 
engage in that business within a certain territory and for 
a certain time. Obviously, if a man cannot make such a 
contract, he will be unable to sell his business. Monopoly 
is not necessarily aimed at by the buyer. As time went on, 
the area in which the courts permitted a man to agree not 
to start up business grew wider and wider. The growth 
was due to the recognition of the increase in the size of the 
competitive area which comes with the development of 
transportation. 

Agreements to raise prices are invalid, under the com- 
mon law, because the interest of the public is directly at- 
tacked. 



The Trust Problem 241 

When the contracts are declared to be in unreasonable 
restraint of trade, the courts refuse to enforce them. It 
may not be a crime to enter into them (legislation often 
makes it such) , but they are useless unless the other parties 
live up to the agreement voluntarily. 

5. Forms of Combination.— One clew to the develop- 
ment of combination is the form of organization used. 
Here at times we find certain inherent economic advan- 
tages or disadvantages of the forms causing the changes. 
But more frequently the change is brought about by legis- 
lation or court action. Indeed, the different forms which 
combinations have taken in the various countries can be 
explained usually by the difference in the laws of the coun- 
tries. Thus, in Germany, the kartell, which corresponds 
in general to our pool, persists because the contracts upon 
which it is based can be enforced. 

In the United States, combinations have taken the form 
of the pool, the trust in the legal sense, the holding com- 
pany, and the merger. It is not implied that the forms 
became extinct, but merely that they ceased to be the typi- 
cal forms of combinations. Thus, the pool is still used at 
the present time, though not as a means of building up big 
permanent combinations. 

6. Pools. — The pool is an agreement to limit competi- 
tion. It has taken on many forms, such as: agreeing on 
prices, dividing the field, limiting output, and selling 
through a common agency. Railroads as well as trusts 
have used pools. 

Professor Jenks gives an account of the Michigan Salt 
Association.^ The salt industry in Michigan had a rapid 
growth after i860. Intense competition arose, and some 
^ Ripley, Trusts, Pools, and Corporations, pp. 1-2 1. 



242 Introduction to Economic Prohleins 

of the competitors were ruined. So, in 1868, an associa- 
tion was formed which handled about four-fifths of the 
product. The association lasted until 187 1, after which 
time competition ruled for five years. Then, in 1876, the 
Michigan Salt Association was formed. It controlled about 
85 per cent of the output. Each manufacturer agreed to 
sell all of his salt to the association, or pay io0 a barrel to 
the association for all that he sold to outsiders. There was 
no limitation on output. The association sold the salt and 
paid each manufacturer the average rate received. 

The Weakness oj the Pool. — Being in restraint of trade, 
the pooling contract cannot be enforced. There is a great 
temptation for each member of the pool to break the agree- 
ment. Often the pool took the form of limitation of out- 
put in order to prevent demoralization of prices. It was 
to the advantage of each individual producer that the total 
production be kept down, but that he himself should pro- 
duce and sell at the higher price as much as possible. So, 
sometimes, the production actually increased after the 
agreement had been made to Hmit it. Thus, it is seen that 
the pool had both legal and economic weaknesses and so 
was not a satisfactory form of combination. 

7. The Trust in the Legal Sense. — This device was the 
product of the fertile brains of the lawyers for the Stand- 
ard Oil Company. It was started in 1879 and enlarged in 
1882. The principle is simple. Properties, particularly 
stocks of corporations, are turned over to trustees in return 
for trustee certificates. The trustees have absolute con- 
trol of the businesses. They may control output, price 
policies, and the division of the field. The earnings from 
all of the concerns are divided among the holders of the 
trustee certificates. 



The Trust Problem 243 

The trust in the legal sense was successful from the eco- 
nomic standpoint. The trustees had effective control, and 
the combination could not be broken by those who had 
turned over their stocks. 

In 1890, the trust in the legal sense received a severe blow. 
In the case against the North River Sugar Refining Com- 
pany (128 New York, 582), it was held that the corporations 
could not enter trusts. Corporations have no powers ex- 
cept those granted in their charter. The court held that 
the corporations joining the trust wer6 giving up their in- 
dependence and self-control and that they could not do 
this under their charters. 

In 1892, the Ohio Supreme Court held the Standard Oil 
Trust void (49 Ohio, 137) on the same grounds, and also 
because the monopoly aimed at was against public poUcy. 

8. The Holding Company. — After the trust, in the legal 
sense, came the holding company. We have seen that a 
corporation has only those powers which are granted in 
its charter. At first, the states would not permit the cor- 
porations which they chartered to hold or own the stocks 
of other corporations. However, New Jersey in 1889 and 
other states later, including New York in 1892, Delaware 
in 1899, ^^d Maine in 1901, modified their laWs and per- 
mitted one corporation to hold stock in another. This 
action opened the way for a very convenient form of com- 
bination. A company would be chartered solely for the 
purpose of owning stocks. A majority of the stocks of 
various competing companies could be acquired in the 
open market or by agreement from the owners. Then, 
directors of the companies could be put in who would fol- 
low the policies desired by the combination. The earn- 
ings of the holding company would be the dividends on the 



244 Introduction to I'lconomic PnMeiaa 

stocks held, and these earnings could be distributed as 
dividends on the stock of the hohJing company. 

The holding company has an advantage over the trust 
in the ease with which control of companies could be ac- 
quired or dis[)Osed ol. 

Ill I lie case of the Standard Oil Company, for a period 
after the trust form had been declared illegal, the combina- 
tion was held together because a group of men owned a 
controlling interest in all of the companies. In 1899, to 
make the combination more secure, the Standard Oil Com- 
pany of New Jersey, which was an operating company, in- 
creased ils ( apilal sltx k and b«( aine a holding c()ni[jany also. 

9. The Merger or Anialgumation. — This is distinguished 
from the holding < ompany in that it results in one big cor- 
poration. The constituent companies lose their separate 
existences. It is called a merger if one company absorbs 
the others; an amalgamation if a new company is formed 
from all of the otiiers. An illustration is given below in 
I he history of the American Tobacco Company. 

10. The American Tobacco Company. The history of 
this company may be taken to illustrate the growth of 
trusts. While it was not the largest combination, it gained 
a larger degree of monopoly than most of the other trusts. 
The American Tobacco Company was organized in 1890 
l)y combining live leading manufacturers of cigarettes, 
liack of the capitalization of $25,000,000 were assets of 
$5,000,000. It soon became tlominaiil in the cigarette 
lleld and secured over 90 per cent of the business of the 
n)untry. This success was based partly on the control of 
the best cigarette-making machines. 

Soon the company began to seek control of other branches 
of the business; namely, smoking tobacco, snuff, plug- 



The Trust Problem 245 

tobacco, and cheroots. The mam attention, at first, was 
given to plug-tobacco. The company developed new 
brands and, at times, sold them below cost to injure com- 
petitors. By this means, in 1897, they had gained control 
of about one-fifth of the plug-tobacco business. The loss 
was made up from the profits on their cigarette business. 

The next step was the organization of the Continental 
Tobacco Company, which took over the plug-tobacco in- 
terests of the American Tobacco Company and united with 
them the leading competitors. The company was domi- 
nated by the American Tobacco Company, although they 
did not control a majority of the stock. It was capitalized 
at $97,690,700. 

About 1897 the character of the management changed. 
Most of the original cigarette men were not in sympathy 
with the effort to extend control over the whole field and so 
sold out their stock. They were replaced by a group of 
financiers. The snufif business was the next to be taken 
up. The companies absorbed by the American and Conti- 
nental Companies had had some snuff business, and new 
snuff companies were acquired. In all, by 1900, they con- 
trolled about one-third of the field. A rival combination, 
called the Atlantic Snuff Company, gave vigorous com- 
petition. This competition was ended by the formation 
of the American Snuff Company, which combined the snuflf 
business of the American and Continental Companies, the 
Atlantic Snuff Companies, and another important firm, the 
George W. Helme Company. This combination, in 1901, 
produced 80.2 per cent of the snuff of the country. 

As an incident to these various combinations, the trust 
had obtained about 60 per cent of the output of smoking- 
tobacco. The experience with cigars was not so fortunate. 



246 Introduction to Economic Problems 

The difficulty lay in the technic of manufacture. Ma- 
chinery has only limited application in making cigars. 
The small hand manufacturer could not easily be driven 
out of his local market. The American Cigar Company 
was started in 190 1. It took over the cheroot and small 
cigar business of the American Tobacco Company and 
bought up cigar-manufacturing concerns. By vigorous 
advertising and promotion it controlled, in 1903, about 
one-sixth of the cigar output of the country. 

The next step was financial. The Consolidated Tobacco 
Company was formed in 1901. It gave its bonds for the 
common stock of the American and Continental Companies. 
Besides providing new capital, this move gave the trust 
leaders control with a smaller investment and a chance to 
get the surplus profits of the business. One source of these 
surplus profits came, in 1901 and 1902, from the reduction 
of the taxes which had been levied during the Spanish- 
American War. The companies did not reduce their 
prices by the amount of the reduction of the taxes, so their 
profits increased greatly. 

The trust had always done some foreign business. It 
had organized or acquired subsidiary companies in 1894 in 
Australia, in 1895 in Canada, in 1899 in Japan, and in 1901 
in Germany. It also exported from this country and sold 
through agencies. In England, this business was not profita- 
ble. So the trust decided to manufacture in England, and 
bought Ogden's (Limited), which was an important tobacco- 
manufacturing concern. This move frightened the British 
manufacturers and so they formed, in 1901, a counter- 
combination called the Imperial Tobacco Company. In 
1902, they acquired a firm which controlled a large number 
of retail stores to give them an outlet for their product. 



The Trust Problem 247 

The fight between the two combinations promised to be 
very bitter and expensive. The Imperial Tobacco Com- 
pany made plans to invade the American field. The result, 
in 1902, was the sale of Ogden's to the Imperial Tobacco 
Company with the agreement that the American and 
British companies should each keep to its own field. The 
two companies also agreed to form the British- American 
Tobacco Company (Limited) to carry on the business out- 
side of the United States and the United Kingdom. 

In 1904, the rather complicated corporate structure 
which had grown up was simplified by a merger. The 
Consolidated, the American, and the Continental Com- 
panies were all merged into the new American Tobacco 
Company. The merger was accomplished by an exchange 
of securities. The reorganized company in 1904 had out- 
standing $40,242,400 common stock; $78,689,100 preferred 
stock; and $136,360,600 of bonds. The common stock 
had the voting power, so the inner group could control 
the whole company with a comparatively small invest- 
ment. 

Many subsidiaries were controlled by the American 
Tobacco Company, the American Snuff Company, the 
American Cigar Company, and the British- American To- 
bacco Company. Besides those directly engaged in manu- 
facturing tobacco, there were others which controlled the 
licorice business, made packages, made machinery; and also 
concerns engaged in wholesale and retail distribution of 
tobacco products. 

The success of the company is seen in the percentages of 
the output of the various branches it had obtained in the 
United States by 1910, namely: cigarettes, 86.1 per cent; 
Httle cigars, 91.4 per cent; cigars, 14.4 per cent; plug-to- 



248 Introduction to Economic Problems 

bacco, 84.9 per cent; smoking- tobacco, 76.2 per cent; fine 
cut, 79.7 per cent; and snuff, 96.5 per cent. 

The dissolution of the trust will be treated in the next 
chapter, 

II. Exercises. — i. Why are not railroad combinations 
called trusts? 

2. Try to calculate the percentage of the output of a 
given line which a company would need to have in order 
to make it a trust. 

3. What is the difference between a trust and a trust 
company ? 

4. Explain the connection between the Industrial Revolu- 
tion and the growth of trusts. 

5. Why is competition fiercer between large-sized busi- 
ness units than between small-sized ones? 

6. Why are unfair methods of competition effective? 

7. Does competition inevitably lead to monopoly? 

8. Why were the profits of the trust promoter large from 
1898 to 1901 ? Why cannot the same large profits be made 
to-day ? 

9. Trace the connection between the tariff and the trusts. 

10. Justify the statement that New Jersey, not the 
tariff, is the "mother of the trusts." 

1 1 . Explain how rebates on freight rates might promote 
the growth of trusts. 

12. How are patents used by trusts? 

13. Illustrate a case that would be reasonable restraint 
of trade under the common law. 

14. If a watchmaker sold his business, would it be a 
reasonable restraint of trade for him to agree not to make 
watches anywhere in the world ? 

15. What usually caused the changes in the form of 
combination ? 

16. What is the economic weakness of the pool? Can 
any method of running the pool be devised which will cor- 
rect this weakness? 



The Trust Problem 249 

17. What was the economic advantage of the trust in 
the legal sense? What was the legal difficulty? 

18. Why has New Jersey been called a "traitor state"? 

19. What are the advantages of the holding company? 

20. Distinguish the merger from the amalgamation. 

21. What features of the tobacco business make it an 
excellent field for a trust? 

22. Why did the American Tobacco Company never 
gain as great a control over cigars as over other kinds of 
tobacco ? 

23. To what extent did the American Tobacco Com- 
pany illustrate integration of industry? 



CHAPTER XV 

THE CONTROL OF TRUSTS 

I. The First Attitude of the Public. 2. The Evils of the Trusts — 
Consumers — Employees — Investors — The State. 3. State Legislation. 
4. The Difficulties of State Regulation. 5. The Sherman Anti-Trust 
Law. 6. Early Effect of the Sherman Law — Knight Case — Addyston 
Pipe Case. 7. The Later Decisions Under the Sherman Law — Stand- 
ard Oil Case — American Tobacco Case — United States Steel Case. 
8. The Seven Sisters Laws of New Jersey. 9. The Federal Trade Com- 
mission Act. 10. The Clayton Act. 11. The Federal Trade Com- 
mission. 12. Difficulties in Regulating Trusts. 13. Exercises. 

1. The First Attitude of the Public— It is hard for us 
to realize the terror which the trusts, in the early days, 
aroused in the minds of the public. The trusts, by their 
rapid growth, seemed destined to control the whole eco- 
nomic organization of the country. The idea of monopoly 
has always been repugnant to the American people. As a 
result of this terror, the people in blind fury decided to 
destroy the trusts. 

2. The Evils of the Trusts.' — Various interests are al- 
leged to have been adversely affected by the trusts. 

Consumers. — Here the main complaints are of higher 
prices, monopolistic practices, poor service, and wasteful 
methods of production. 

Employees. — Labor-unions have opposed trusts because 
they were afraid that the power of the trusts would be used 
to crush the unions. Combining separate companies into 
a trust was worse than forming an employer's association. 
On the other side, some have argued that with big profits 
the trusts could pay higher wages. 

1 Cf. Haney, Business Organization and Combination, pp. 366^. 

250 



The Control of Trusts 251 

Investors. — Many of the early promotions were marked 
by excessive profits to promoters and underwriters. In- 
vestors were deceived as to the amount of assets back of 
the securities issued. Insiders often manipulated affairs 
in such a way as to divert the earnings to themselves. 
Minority stockholders were sometimes frozen out. Reck- 
less financial policies have led to failure and reorganization 
in which investors suffered losses. 

Competitors. — In the chapter on Unfair Competition, we 
have seen the great variety of ways in which competitors 
have been injured by the trusts. 

The State. — Some trusts have been accused of political 
corruption. Some people fear that the power of the trusts 
will become so great that they will control the government. 

3. State Legislation. — Many of the states acted before 
the federal government and attempted to control trusts. 
The Kansas law of 1889 may be taken as typical.^ 

Section i . That all arrangements, contracts, agreements, 
trusts or combinations between persons or corporations 
made with a view or which tend to prevent full and free 
competition in the importation, transportation or sale of 
articles imported into this state or in the product, manu- 
facture or sale of articles of domestic growth or product of 
domestic raw material, or in the loan or use of money, or 
to fix attorneys' or doctors' fees, and all arrangements, 
contracts, agreements, trusts or combinations between 
persons or corporations designed or which tend to advance, 
reduce or control the price or the cost to the producer or 
to the consumer of any such products or articles, . . . are 
hereby declared to be against public policy, unlawful and 
void. 

1 Quoted in Stevens, Industrial Combinations and Trusts, pp. 45-46. 



252 Introductio7i to Economic Problems 

Penalties for violations were fines from $ioo to $i,ooo, 
or imprisonment from thirty days to six months, or both. 

About twenty states had passed similar legislation by 
1894. The legislation aimed to destroy the trusts and 
insure free competition. 

The present law in New York State is as follows (Laws 
of 1909, chapter 25, amended in 191 8 by adding last para- 
graph) : 

Section 340. Contracts for monopoly illegal and void. 
Every contract, agreement, arrangement or combination 
whereby a monopoly in the manufacture, production or 
sale in this state of any article or commodity of common 
use is or may be created, established or maintained, or 
whereby competition in this state in the supply or price 
of any such article or commodity is or may be restrained 
or prevented, or whereby for the purpose of creating, es- 
tablishing or maintaining a monopoly within this state of 
the manufacture, production or sale of any such article or 
commodity, the free pursuit in this state of any lawful 
business, trade or occupation is or may be restricted or 
prevented, is hereby declared to be against public policy 
illegal and void. 

The provisions of this article shall not apply to co-opera- 
tive associations, corporate or otherwise, of farmers, gar- 
deners or dairymen, including live-stock farmers and fruit- 
growers, nor to contracts, agreements or arrangements 
made by such associations. 

The penalty for violating the law is a fine of not over 
$5,000, or imprisonment for not longer than one year, or 
both. For corporations, the penalty is a fine of not more 
than $20,000. 

Under this law, nineteen members of the Marble Indus- 



The Control of Trusts 253 

try Employers' Association in December, 1921, were fined 
and sentenced to prison. The prison sentence was sus- 
pended. 

4. The Difficulties of State Regulation. — On the whole, 
not much came from the efforts of the states to regulate 
trusts. We have seen in the preceding chapter that state 
judicial decisions forced the abandonment of the trust in 
the legal sense as a form of organization. However, the 
result was merely a change in the form of organization, 
not the break-up of the combination. States were hampered 
in their attempts to regulate by the fact that the trusts 
usually had charters from other states, and under the 
practice of comity among the states, could do business 
within the state. The trusts usually had better lawyers 
than the states. The later experiences of some of the 
states, such as Texas, show that with appropriate legisla- 
tion and persistent legal attack, trusts can be driven from 
the state. There is a question whether driving out the 
trust is desirable, and also whether the trust will not come 
back in the guise of another corporation. 

The chief difficulty with state regulation is that the 
trusts are national in scope. Even if a state does drive 
the trust out of its borders, it still exists in the other 
states. Uniform united action by all of the states can 
hardly be expected. 

5. The Sherman Anti-Trust Law. — In 1890, Congress 
followed the lead of the states and passed a law against 
trusts. 

Section i. Every contract, combination in the form of 
trust or otherwise, or conspiracy, in restraint of trade or 
commerce among the several states, or with foreign na- 
tions, is hereby declared to be illegal. Every person who 



254 Introduction to Economic Problems 

shall make any such contract or engage in any such com- 
bination or conspiracy, shall be deemed guilty of a mis- 
demeanor, and, on conviction thereof, shall be punished 
by fine not exceeding five thousand dollars, or by imprison- 
ment not exceeding one year, or by both said punishments, 
in the discretion of the court. 

Section 2. Every person who shall monopolize, or at- 
tempt to monopolize, or combine or conspire to monopolize 
any part of the trade or commerce among the several 
states, or with foreign nations, shall be deemed guilty of 
a misdemeanor, and, on conviction thereof, shall be pun- 
ished by fine not exceeding five thousand dollars, or by 
imprisonment not exceeding one year, or by both said 
punishments, in the discretion of the court. 

6. Early Effect of the Sherman Law. — This drastic law 
had, for a long time, but little effect. Few cases were 
started and they were not successful. The first successful 
cases were the ones against railroad associations mentioned 
in the chapter on Railroad Regulation. There is grave 
doubt whether Congress intended the law to apply to rail- 
roads, as the Interstate Commerce Act of 1887 was sup- 
posed to regulate them. 

It is a grim commentary on the effectiveness of the law, 
that the great period of trust formation, 1898 to 1901, came 
after this law was passed. Moody^ says that there were 
in 1904 in the United States 318 important trusts with a 
capital of $7,246,342,533. Of these, 236 trusts with a 
capital of $6,049,618,223 had been started since January 
I, 1898. 

The Knight Case (156 U. S., i). — This case was decided 
in 1895, and since then has seriously hampered the regula- 
i Truth About the Trusts, p. 486. 



The Control of Trusts ^55 

tion of business by the federal government. The American 
Sugar Refining Company was a New Jersey corporation 
which had, by 1892, combined all of the sugar-refineries in 
the United States, except a small one in Boston and four 
refineries in Philadelphia. These four refineries competed 
with each other and, taken together, furnished about one- 
third of the sugar of the country. In 1892, they were pur- 
chased by the American Sugar Refining Company. Then 
they were sued under the Sherman law. The supreme 
court held that the combination of manufacturers of an 
article which went into interstate commerce was not re- 
straint of interstate commerce. They made a sharp dis- 
tinction between manufacture and commerce, which seems 
hard to justify. 

The Addyston Pipe Case (175 U. S., 211). — In 1899, the 
Addyston Pipe and Steel Company was found to be in a 
combination in restraint of trade. Six companies making 
cast-iron pipe entered into an agreement which divided the 
country and fixed the price at which pipe was to be sold. 
The supreme court held that this agreement violated the 
Sherman law. 

7. Later Decisions Under the Sherman Act. — In 191 1, 
it was finally discovered that the Sherman Act really could 
be used effectively to break up trusts. 

The Standard Oil Case (221 U. S., i). — The Standard Oil 
Company of New Jersey, it will be remembered, became a 
holding company after the trust form of organization had 
been outlawed. Besides operating its own business, it held 
the stocks of the subsidiaries and controlled them. The 
supreme court held that the device of the holding company 
was, in this case, a combination in restraint of trade and 
an attempt to monopolize and so ordered its dissolution. 



256 Introduction to Economic Problems 

A point of interest in the case is the reading into the law 
of what is called the ''rule of reason." Under the common 
law it was recognized that some combinations in restraint 
of trade might be reasonable. The wording of the Sherman 
Act seems to condemn all combinations. However, the 
supreme court held that the law condemned only unreason- 
able combinations, but that, in as much as that the Standard 
Oil Company was an unreasonable combination in restraint 
of trade, it must be dissolved. 

The Dissolution of the Standard Oil Company.— The 
Standard Oil Company of New Jersey got rid of the stock 
which it held in thirty-three companies by dividing it pro 
rata among its stockholders. These companies were en- 
joined by the court from combining or in any way violating 
the Anti-Trust Act. Of course, the pro rata distribution 
of the stock did not alter the fact that just as a small 
group had dominated the Standard Oil Company of New 
Jersey, the same small group could dominate each of the 
thirty-three companies. The idea of the court was prob- 
ably that as time went on, the ownership of the companies 
would change. 

The American Tobacco Company Case (221 U. S., 181). — 
This case was also decided in 191 1, shortly after the Stand- 
ard Oil case. The "rule of reason" was again affirmed, 
but the Tobacco Company was held not to be a reasonable 
combination. The chief point of distinction between the 
Tobacco Company and the Oil Company was that the 
Tobacco Company was a merger. After the Northern 
Securities case had established the illegality of the holding 
as a device for bringing about combination, the new Amer- 
ican Tobacco Company was formed from the old American 
Tobacco Company, the Consolidated Tobacco Company, 



The Control of Trusts 257 

and the Continental Tobacco Company. This decision put 
an end to the hope that direct ownership by a giant cor- 
poration would bar prosecution as a combination. 

The supreme court ordered the company to dissolve. 

The Dissolution of the American Tobacco Company.— 
The essential feature of the dissolution from the manufac- 
turing standpoint was the creation of three companies: 
the American Tobacco Company, the P. Lorillard Com- 
pany, and the Liggett and Myers Tobacco Company. The 
different factories and brands for the various classes of 
tobacco were divided among these three companies in such 
a manner that no one company had the dominant position 
in any class of tobacco product. Some of the subsidiaries 
which were combinations were forced to split up. Includ- 
ing these subsidiaries, fourteen corporations were to be the 
result of the dissolution. All of these fourteen corpora- 
tions were enjoined by the court from having common 
officers or directors or combining in any way. 

The United States Steel Corporation Case (251 U. S., 417)* 
—The United States Steel Company is the largest corpora- 
tion in the world. It was formed in 1901 by combining 
many companies which were themselves combinations. 
It was attacked under the Sherman Act, but the supreme 
court held, in 1920, that the combination did not violate 
the law. The court held that mere size was not an offense 
nor the existence of unexerted power. They also said that 
the dissolution of the company might injure public interest. 

8. The Seven Sisters Laws of New Jersey. — New Jersey 
gained ill repute by enacting a law, in 1889, permitting one 
company to hold stock in another company. This law 
made it possible to use the holding company as a means 
of combination. In 19 13, under the leadership of Governor 



258 Introduction to Economic Problems 

Wilson, seven laws were passed which aimed to help to 
solve the trust problem. The provisions of the laws may 
be briefly indicated: 

(i) Combinations are illegal if they restrict trade, ac- 
quire a monopoly, limit production, increase prices, set 
resale prices, agree to restrict competition. Those order- 
ing the acts are guilty, and the charter of a corporation 
may be revoked. 

(2) Discriminating prices are forbidden if they lead to 
monopoly, hinder competition, or restrict trade. 

(3) Stock-watering is prohibited. 

(4) It is a misdemeanor to organize a corporation to do 
fraudulent or unlawful things. 

(5) Mergers are permitted. 

(6) Holding companies to limit competition are pro- 
hibited. 

(7) Mergers must have the approval of the Board of 
Public Utility Commissioners. 

9. The Federal Trade Commission Act.— In 1914, Con- 
gress passed two laws for the regulation of trusts. The 
Federal Trade Commission Act, as its name implies, pro- 
vides for a commission to regulate trusts. The law states 
that unfair methods of competition are unlawful. The 
commission is composed of five members appointed by the 
President with the consent of the Senate. It has wide 
powers of investigation either on its own initiative or on 
complaints brought by interested parties. The commis- 
sion can require annual and special reports of the corpora- 
tions subject to it. The commission reports to Congress 
and submits recommendations. 

ID. The Clayton Act. — This is the second of the laws to 
control trusts passed by Congress in 1914. Its similarity 



The Control of Trusts 259 

to the New Jersey legislation is evident. It prohibits dis- 
criminating prices (where the variation is not due to quan- 
tity, quality, cost of selling, or transportation), ''tying 
clauses," and holding companies whenever these practices 
tend substantially to lessen competition or create monopoly. 
It prohibits interlocking directorates between large banks 
and large corporations. It restricts buying by railroads 
from companies in which the railroad officers are interested. 

The law also contained provisions about labor which do 
not concern us here. 

II. The Federal Trade Commission. — In 1903, Congress 
established the Bureau of Corporations in the Department 
of Commerce and Labor. The Federal Trade Commission 
is an outgrowth of this bureau, but has vastly greater 
powers. To it is intrusted the duty of preventing unfair 
methods of competition, and we have spoken of its work in 
that connection in an earlier chapter. 

The commission is given the duty of seeing that anti- 
trust decisions are carried out. On request of the attorney- 
general, it may suggest methods of readjusting businesses 
which are violating the anti-trust laws. 

The commission has made many investigations. Among 
others, they have published reports on the grain trade in- 
cluding futures, meat-packing, private car-lines, book paper, 
news-print paper, flour milling and jobbing, beet-sugar, 
canned food, wholesale marketing of food, woollen-rag trade, 
sugar supply and prices, coal-fields, and farm implements. 
These reports provide a store of information on business 
organization and practices. 

Some have thought that, in time, the Federal Trade Com- 
mission would exercise a control over business similar to 
that exercised by the Interstate Commerce Commission 



260 Introduction to Economic Problems 

over railroads. The latest extension of governmental con- 
trol does not bear out this idea. For, when Congress in 
1 92 1 passed legislation concerning stock-yards and meat- 
packing, these industries were placed under the supervision 
of the secretary of agriculture. The secretary may call upon 
the Federal Trade Commission to make investigations. 

12. Difficulties in Regulating Trusts. — The policy im- 
plicit in the Federal Trade Commission and Clayton Acts 
is that we do not need to fear trusts except when they use 
unfair practices. No one will question the desirability 
of getting rid of the unfair practices, but even with them 
gone, there still remain problems. One suggestion is that 
the Law of Public Callings be applied to trusts. They 
would then be required to serve all who come, with ade- 
quate facilities, at reasonable rates, and with no discrimina- 
tion. Regulation to force them to do these things would 
be extremely difficult. It would involve governmental 
control of prices. To make this control effective, the gov- 
ernment would be forced to make valuations of the capital 
employed and to keep continuous cost records to see that 
reasonable prices were being charged. Some public utili- 
ties are satisfactorily regulated on that basis, but their 
case is simpler because they ordinarily sell only a single 
service. If the prices of the packers should be regulated, 
think of the complexity involved in the numerous main 
products and the multitude of by-products. 

13. Exercises. — i. Why are we less afraid of trusts than 
our forefathers? 

2. Argue that trusts are a benefit to consumers. 

3. What is the attitude of the United States Steel Cor- 
poration to its employees? Is this attitude typical of all 
trusts ? 



The Control of Trusts 261 

4. Is the injury to investors limited to trusts, or is it a 
general corporation problem? 

5. What are the dangers to the state in the growth of 
gigantic trusts? What is the complaint of the miners 
against the coal companies in West Virginia? 

6. What was the aim of the state anti-trust legislation? 

7. What is the weakness of the state anti- trust legisla- 
tion? 

8. What is the difference between a combination in re- 
straint of trade and an attempt to monopolize? 

9. Why did not the Sherman Anti-Trust law prevent 
the formation of trusts? 

10. From an economic standpoint, what is the weakness 
in the reasoning of the Knight case? 

1 1 . How does the Addyston case differ from the Knight 
case? 

12. What is the "rule of reason"? How can it be har- 
monized with the language of the Sherman Act? 

13. Explain and criticise the plan for the dissolution of 
the Standard Oil Company. 

14. What effect did the dissolution have on the price of 
the stock of the Standard Oil Company? 

15. In what ways was the dissolution plan for the Amer- 
ican Tobacco Company superior to the plan for the Stand- 
ard Oil Company? 

16. Were consumers benefited by these two dissolutions? 

17. How did the Steel Corporation differ from the Oil 
Company and the Tobacco Company? 

18. What theory of trust regulation is back of the Seven 
Sisters laws of New Jersey? 

19. Outline the variations in prices which are justifiable. 

20. Under what conditions is the public benefited by 
mergers ? 

21. {a) What are the powers of the Federal Trade Com- 
mission ? 

(&) How do they compare with the powers of the Inter- 
state Commerce Commission and the Federal Reserve 
Board? 



262 Introduction to Economic Problems 

22. What is the aim of the Clayton Act? 

23. List the activities of the Federal Trade Commission. 

24. Outline a plan for regulating, by public authority, 
the prices of the products of the American Woollen Com- 
pany. 



CHAPTER XVI 

FOREIGN TRADE AND FOREIGN EXCHANGE 

1. The International Division of Labor. 2. Trade Based on Natural 
Differences. 3. Trade Based on Differences in Economic Develop- 
ment. 4. Trade Based on Specialization. 5. The Meaning of For- 
eign Exchange. 6. The Demand for and Supply of Foreign Exchange. 
7. Mint Pars and Gold Points. 8. The Balance of International Pay- 
ments. 9. The Correctives of the Exchanges. 10. Arbitrage. 11. 
Exchange Rates with Countries on a Paper Standard. 12. Exchange 
Rates with Countries with a Silver Standard. 13. The Gold-Exchange 
Standard. 14. The Regulation of Gold Movements. 15. The Effect 
of the War on the Exchanges. 16. Dollar Exchange — Bankers' Ac- 
ceptances. 17. Exercises. 

I. The International Division of Labor. — Foreign trade 
differs in some superficial ways from domestic trade. It 
crosses a political boundary. Often two monetary systems 
are involved. The distance involved is frequently greater 
than that involved in domestic trade. In many cases the 
government interferes for purposes of regulation or for 
revenue. In spite of these surface differences, foreign trade 
is fundamentally the same as domestic trade. The com- 
mon view often attempts to make a difference between the 
two parts of the trade, holding that it is profitable to sell to 
foreigners but disastrous to buy from them. Historically, 
this was the attitude of the mercantile system. Its ad- 
vocates hoped by this policy of selling more than they 
bought to bring supplies of the precious metals into their 
country. 

Foreign trade does differ from domestic trade in one im- 
portant particular. Within a country, we expect in the 
long run a fairly close correspondence between the wage 

263 



264 Introduction to Economic Problems 

rates and profit rates in the different sections. We expect 
this because any great difference would cause a movement 
of labor and capital from the low return to the high return 
districts. Between countries, we find a movement of emi- 
grants and of capital, but the movement is more or less 
impeded. To the inertia which comes from family ties and 
community association is added the disinclination to leave 
one's fatherland. Those with capital to invest, feel that it 
is safer at home than abroad, where it will be under a dif- 
ferent set of laws and perhaps dependent for its security 
on courts which are not friendly to foreigners. 

The result of foreign trade is international division of 
labor. Just as division of labor among workers permits an 
individual to specialize on the work for which he is best 
adapted, so international division of labor permits a coun- 
try to specialize in the things which it is best fitted to pro- 
duce. The fitness may be the result of natural resources, 
of the stage in industrial development, or of a mere accident 
of an early start. 

2. Trade Based on Natural Differences. — The most 
striking cases of this sort are those of mineral deposits. 
South Africa has gold deposits and diamond-mines. For 
gold and diamonds they get all of the things they need from 
other countries. Another illustration is the trade between 
the tropics and the temperate countries. The differences 
in climate result in differences in product. The tropics ex- 
change fruits, rubber, coft'ee, spices, etc., for machinery, 
textiles, etc., from the temperate countries. This type of 
trade has an element of permanence, for these natural dif- 
ferences will persist. 

3. Trade Based on Differences in Economic Develop- 
ment. — Some countries have gone further in the develop- 



Foreign Trade and Foreign Exchange 9>Q5 

ment of manufactures than ^thers. Historically, England 
had her Industrial revolution long before the other coun- 
tries. In the case of the United States, for a long time we 
were an agricultural people. When a country is first opened 
up for settlement, agriculture is usually the most profit- 
able pursuit for the people. Land is the long factor and 
labor the short factor. Later, with the growth of popula- 
tion, the time may come when it will pay to manufacture; 
but for a considerable time manufactured goods can be ob- 
tained with less effort by raising agricultural products and 
trading them with some nation which has developed manu- 
factures. England became a country which specialized in 
manufactures, trading them for food and raw materials 
with countries industrially less developed. 

This type of trade is less permanent than that based on 
natural differences. Thus, the United States has become a 
great manufacturing nation and no longer exports any great 
proportion of the food raised. 

4. Trade Based on Specialization. — Trade may exist 
between two countries with about the same natural re- 
sources and about the same stage of industrial development. 
It is profitable to specialize to get the advantages of large- 
scale production and to develop special skill. Frequently, 
no particular reason can be given to explain why one line 
of industry was developed rather than another. It is this 
type of trade which causes the seeming anomaly of Great 
Britain exporting woollens to Germany and also importing 
woollens from Germany. Each has specialized in some type 
of woollen manufacture. 

5. The Meaning of Foreign Exchange. — The trade be- 
tween countries which arises from any of the reasons given 
above brings certain problems in connection with the pay- 



266 Introduction to Economic Prohlcms 

ment. Frequently, the monetary systems of tJie countries 
are ditTorcnt. The payments must be made at a distance. 
Many of the transactions are credit transactions; that is, 
tliey involve a period of waiting before the payments are 
made. In the study of foreign excliange we deal with the 
mechanism by which payments are mixdc in international 
trade. 

Most people are familiar with the idea of domestic ex- 
change. When payments are to be made at a distance 
within the country, drafts on New York City are frequently 
used instead of using the ordinary bank check. In like 
manner, when payments are to be made between countries, 
drafts on banks or merchants are used in making the pay- 
ments. These drafts, of course, are orders to pay money. 
They ditTer from the domestic drafts because tliere are 
two monetary systems involved. Thus, a merchant in the 
United States who wishes to make a pa>inent in London 
may buy a draft in pounds sterling and pay for it in dolUirs. 

We may begin our study of foreign exchange by seeing 
what the financial page of the newspapers gives about it. 

FRIDAY, MARCH 4, 1921 

RANGE OF R.\TES, SIGHT EXCHANGE 

Thurs. 

High. Low. Final. Final. 

LONDON $3,-9oU $iSg}i $3.89,>i $389^ 

PARIS 7-24K 71^^ 7 I*) 7 19 

ROME 3.68 3. 68 3.68 3.66 

AMSTERDAM... 34. 35 34 :vS 34 .>5 34-23 

BERLIN l.63>i 1.60 i.6.\i; 1.61K 

MADRID 13.94 13-94 I3 94 ^3 96 

CLOSING RATES 

Parity of exchange is given as reported by the U. S. 
Mint, except in countries with a silver standard, where 
parity fluctuates with the price of silver. 



Foreign Trade and Foreign Exchange 267 



EUROPE 

Week 
Friday. Ago. 

STERLING— Par $^.%6H per sovereign. 

Demand 389;^ 3.86>^ 

Cables 3-9oX ?)-^7/i 

Com., 60 days 3.84X 3.82>^ 

Com., 90 days 3.82 3.80K 

FRANCE — Par 19.3 cents per franc. 

Demand 7.19 7. 18 

Cables 7.20 7-i8K 

ITALY — Par 19.3 cents per lira. 

Demand 3 . 68 3 . 64 >^ 

Cables 3.69 3-65>^ 

BELGIUM — Par 19.3 cents per franc. 

Demand 7.52 7- 51 

Cables 7.53 7.52 

GERMANY — Par 23.8 cents per mark. 

Demand i.62>^ i .6o>^ 

Cables 1.63 i .6i>^ 

AUSTRIA — Par 20.3 cents per crown. 

Demand 22 .23 

Cables 22 >^ .23^ 

CZECHOSLOVAKIA— Par 20.3 cents per crown 

Demand i . 32 1.25 

Cables 1.33 i .27 

DENMARK— Par 26.8 cents per krone. 

Demand 1 7 ■ 30 1 8 . 05 

Cables 17-35 18. 10 

FINLAND— Par 19.3 cents per finmark. 

Remand 2 . 85 310 

Cables 2.90 3.15 

GREECE — Par 19.3 cents per drachma. 

Demand 7 . 48 7 . 45 

Cables 7 . 53 7 . 50 

HOLLAND — Par 40.2 cents per florin. 

Demand 34-35 34-13 

Cables 34-40 34- 18 

HUNGARY — Par 20.3 cents per crown. 

Demand 26 . 20>^ 

Cables 26^2 21 

JUGOSLAVIA — Par 20.3 cents per crown. 

Demand 72 .70 

Cables 73 .71 



Year 
Ago. 



65 

65 >< 
60 

58 

29 
30 

60 
61 

60 
61 

05 
07 

42 

44 

14 
19 

10 
25 

55 
60 

05 
10 

375 
50 



268 Introduction to Economic Problems 

Week Year 

Friday. Ago. Ago. 

NORWAY— Par 26 . 8 cents per krone. 

Demand 16.35 17-25 1785 

Cables 16.40 17.30 18.00 

POLAND — Par 23.8 cents per mark. 

Demand 13 -^i^A 64 

Cables I3>^ 133^ 67 

RUMANIA — Par 19.3 cents per leu. 

Demand 1.40 i-36 152 

Cables 1.41 i-38 157 

SERBIA, Belgrade — Par 19.3 cents per franc. 

Demand 2.80 2.78 3.30 

Cables 2.85 2.80 3.35 

SPAIN — Par 19.3 cents per peseta. 

Demand 13-94 13 QO i7-90 

Cables 1396 13-92 18.00 

SWEDEN— Par 26.8 cents per krone. 

Demand 22.35 22.32 19.45 

Cables 22.40 22.38 19.50 

SWITZERLAND— Par 19.3 cents per franc. 

Demand 16.70 16.56 17.09 

Cables 16.75 16.58 17.16 

FAR EAST 

CHINA — Cents per silver dollar for Hongkong; per tael 
for Shanghai and Peking. 

Hongkong, demand 45 • 5o 

Hongkong, cables 45-6o 

Peking, demand 65.00 

Shanghai, demand 59 • 50 

Shanghai, cables 60.00 

INDIA — Calcutta, cents per rupee, stabilized at one-tenth 
of a pound sterling. 

Demand 27.25 27.00 4650 

Cables 27.50 27.50 47.00 

PHILIPPINE ISLANDS— Manila: par 50 cents per silver 
peso. 

Demand 47-75 47-75 49-125 

Cables 48.00 48.00 49-375 

JAVA — Par 40.2 cents per florin. 

Demand 35 -5" 34 -50 

JAPAN — Par 49.8 cents per yen. 

Demand 48-375 4850 -47-125 

Cables 48.50 48-75 47-375 



48-50 


101 


00 


48.60 


lOI 


10 


70.50 


164 


00 


65.00 


152 


00 


65-50 


52 


50 



Foreign Trade and Foreign Exchange 269 

SOUTH AMERICA 

Week Year 

Friday, Ago. Ago. 
ARGENTINA — Par 42.44 cents per Argentine paper dollar. 

Demand 34.75 35.06 43.65 

Cables 35.00 35.18 43.75 

BRAZIL— Par 32.45 cents per paper milreis. 

Demand 15875 15.625 26.125 

Cables 16.00 15-75 26.25 

CANADA 

MONTREAL— Par 100 cents per Canadian dollar. 
Demand 87.7 87.7 87.5 

RUSSIAN CURRENCY 

Prices for pre-revolution Russian ruble notes were as 
follows, par 51.40 cents per ruble: 

Bid. Asked. 

100 ruble notes, per ruble 45 .50 

500 ruble notes, per ruble 42 >^ .44 

The first thing we notice is that we have prices quoted. 
We are interested, of course, in knowing why those prices 
are what they are. 

6. The Demand for and Supply of Foreign Exchange. — 
If we take the case of sterling exchange, we say its price 
depends on the demand for drafts on London and the sup- 
ply of drafts on London. The demand for drafts on Lon- 
don comes from those people who have obligations to meet 
in London. These obligations may arise in several ways. 

First, of course, come importers in the United States who 
have purchased goods in London. Then, payments by the 
United States Government for the expenses of its embassies, 
consulates, and other foreign representatives necessitate 
the purchase of sterling exchange. Before the war, most of 
our foreign shipping was carried in British ships and was 
insured in British insurance companies. These transac- 
tions gave rise to a considerable demand for sterling ex- 



270 Introduction to Economic Problems 

change. Whenever an American tourist goes to Europe, he 
must provide himself with funds which will be available in 
Europe, Perhaps the commonest way of doing that is to 
buy sterling exchange, which can be turned into English 
currency or the currency of any other country. Another 
important group of transactions which gives rise to a de- 
mand for foreign exchange may be called investment trans- 
actions. If American investors make loans to the gov- 
ernments or the businesses of foreign countries, there is a 
demand for foreign exchange. 

The supply of foreign exchange comes from those people 
who have credits abroad. As in the case of the demand 
for exchange, the merchandise transactions are of first im- 
portance. Here, of course, it is the exporter who has the 
supply of exchange abroad. If we develop our merchant 
marine and the business of marine insurance to such an 
extent that we carry goods for other countries, then we 
will have a supply of foreign exchange from that source. 
The indebtedness of the foreign countries to the United 
States furnishes a potential supply of foreign exchange. 
It is not actual so long as the foreign governments are not 
paying the interest on the indebtedness and are not making 
repayments of the principal. Financial transactions also 
affect the supply of foreign exchange. If we take the 
situation of the United States in early times when we were 
a debtor nation and European countries were lending vast 
sums to develop our railroads and other industries, we see 
that the first effect was to furnish a supply of foreign ex- 
change. That is, if the Pennsylvania Railroad borrowed 
money in London, it had a credit in London against which 
it could draw bills of exchange and sell them in the New 
York market. Of course, as soon as the Pennsylvania 



Foreign Trade and Foreign Exchange 271 

Railroad had to meet interest on its obligations, it appears 
as a demander for foreign exchange, and when it must pay 
the obligations at maturity it must buy foreign exchange 
covering the amount of the indebtedness. This relation- 
ship is probably now reversed. We are lending to Europe, 
and thus a demand for foreign exchange is created; and 
when repayments are made, a supply of foreign exchange 
will be created. 

It will be noticed that various types of exchange are 
quoted. Demand exchange means a bill on a bank in a 
foreign country payable on demand. That is, payable as 
soon as it reaches the foreign country. Cables represent 
transactions carried on by cable, and so, of course, they 
are available immediately. The slight difference in price 
between demand and cables is explained by the fact that 
the demand exchange is available only after the voyage 
across the Atlantic, which may take about a week; while 
the cables are available at once. In the case of England, 
commercial bills are also quoted. Commercial bills are 
bills drawn, not on banks, but on business houses. They 
ordinarily are lower in price than the bankers' bills because 
the credit of the business man is not quite so high as that 
of the bank. Commercial bills also frequently are time 
bills. That is, payable at the end of sixty or ninety days. 
In this case, the price is lower than demand bills because 
of the sixty or ninety days which must elapse before pay- 
ment can be obtained. 

7. Mint Pars and Gold Points. — In each case, above the 
quotation is given a figure for the par. The mint par of 
exchange is a comparison of the pure-gold contents of the 
monetary units of the two countries. Thus, the mint par 
between the United States and Great Britain which appears 



272 Iniroduciion to Economic Problems 

as sterling exchange in the table, is given as $4,865-^ per 
sovereign. This is obtained by comparing the pure-gold 
content of an English sovereign, which is slightly more than 
113 grains, with the pure-gold content of the United States 
dollar, which is 2^.22 grains; 113 divided by 23.22 equals 
4.86f^. The mint par witJi silver countries is the value 
in terms of our monetary unit of the pure silver in the coin. 
So long as the monetary units in gold-standard countries 
remain the same, the mint pars between the countries will 
be the same. The mint pars between gold-standard and 
silver-standard countries change with every change in the 
price of silver. Obviously, there can be no mint par be- 
tween a gold-standard country and a country on a paper 
basis. Frequently, however, the law of the country sets 
a value on the paper in terms of gold. From this value 
is computed the par of exchange. Argentina is a case of 
this sort. 

The ordinary statement about the price of exchange is 
that it varies about tlie mint par of exchange within the 
limits which are distant from the mint par an amount 
which covers the cost of shipping the unit value of gold. 
These limits are called the gold points, or the specie points. 
The explanation given of this limitation is that no buyer 
of exchange would pay more for exchange than the amount 
which it would cost him to ship gold, and no seller of ex- 
change would take less for his bill tlian the cost of getting 
the gold from the foreign country. This cost used to be 
stated as about 2C^ a pound sterling in the case of sterling 
exchange. 

One of the disruptions of the ordinary procedure in 
financial transactions caused b>- the war was the stoppage 
of the free movement of gold between countries. In all 



Foreign Trade and Foreign Exchange 273 

of the European countries at the present time there are 
hindrances to the movement of gold. This does not mean 
that there are no gold movements permitted, but simply 
that the government through their treasuries insists on 
controlling the movement. A casual glance at the table 
shows that this limitation of gold movements makes the 
old statement about gold points a matter of historical 
rather than present interest. 

8. The Balance of International Payments. — In a previous 
section, we enumerated some of the various transactions 
which give rise to the supply of or the demand for exchange. 
Various attempts are made to express the items for a coun- 
try for a given period in the form of a balance-sheet. We 
give two such attempts, one before the war and one after 
the war. 

BALANCE OF INTERNATIONAL PAYMENTS, 1908-19091 

Items causing a supply of exchange : 

Merchandise exports $1,663,000,000 

Excess of gold exports over imports 48,000,000 

Excess of silver exports over imports 12,000,000 

Foreign investments in United States 184,000,000 

$1,907,000,000 
Items causing a demand for exchange : 

Merchandise imports $1,312,000,000 

Interest paid to foreigners 250,000,000 

Tourist expenditures 170,000,000 

Remittance to friends abroad 150,000,000 

Freight paid to foreigners 25,000,000 

$1,907,000,000 

1 Adapted from George Paish, Trade Balance of U. S. (National 
Mon. Comm.), p. 179. 



274 Introduction to Economic Problems 

BALANCE OF INTERNATIONAL PAYMENTS 
JANUARY 1, 1919, TO NOVEMBER 1, 1920> 
(In millions of dollars) 
Items causing a supply of exchange : 

Exports of merchandise and silver $l5i098 

Exports of gold 653 

Foreign loans matured and paid ofif 1,086 

Freights due to United States and proceeds from sale of ships 1,011 

Interest payments from allied governments 1 77 

Interest payments on private American capital abroad 311 

$18,336 
Items causing a demand for exchange : 

Imports of merchandise and silver $8,765 

Imports of gold 393 

New issues of foreign government loans 771 

Foreign corporate bond issues 126 

American securities returned 200 

American purchases of European internal securities 155 

Other foreign private investment 500 

Government cash advances to foreign governments 2,131 

United States Government purchases of European currencies 

to cover expenditures in Europe 559 

Relief 84 

Interest payments on foreign capital in the United States. ... 100 

Freight payments to foreigners 890 

Credits granted by United States Grain Corporation 60 

Immigrants' remittances 600 

Tourists' expenditures 150 

Floating indebtedness due to United States 2,852 

$18,336 

The rates on a country will be high or low according to 
whether the balance of international payments as a whole 
shows an excess of exports or an excess of imports. Thus, 

^ J. W. Williams, The Foreign Trade Balance of the U. S. since the 
Armistice, Amer. Econ. Rev. Suppl., March, 1921, p. 30. 



Foreign Trade and Foreign Exchange 275 

the rates on the United States in all other countries are 
high, partly because of the high excess of exports (the de- 
preciation of the foreign currencies also enters in). This 
is the same thing as saying that in the United States the 
exchange on the other countries is low in price. 

9. The Correctives of the Exchanges. — We have seen 
that in times when gold is permitted to move freely be- 
tween nations, the price of exchange varies within the limits 
of the gold points. Gold moves if the balance of interna- 
tional payments is against one country. We shall now see 
why a country cannot continue to lose gold and another 
country gain gold indefinitely. The movement of gold sets 
in motion certain forces which tend to counteract the flow. 
The gold shipped out ordinarily comes from the bank re- 
serves of the country; from the central bank if the country 
has one. The loss of reserves tends to stiffen money rates 
in the country which lost the gold and to ease the money 
rates in the country which received the gold. (To simplify 
the explanation, we assume that only two countries are in- 
volved.) The changes in the relative interest rates may 
cause international bankers to shift their balances to the 
country with the high discount rates. This increases the 
demand for exchange on the country which lost the gold 
and may be enough to stop the flow. The stiffness of 
money rates would have a tendency to check speculation 
and to cause a decline in the prices of stocks and speculative 
commodities, such as wheat and cotton. The easy money 
rates in the other country would have the opposite effect. 
Thus, foreigners would buy stocks and commodities in the 
country that lost the gold. This buying would cause a 
demand for exchange which would raise its price and per- 
haps stop the flow of gold. 



276 Introduction to Economic Problems 

The high exchange rates in the country which lost the 
gold on other countries would have some effect on the ex- 
port and import of merchandise. Exports would be some- 
what facilitated, for the exchange on the other countries 
received for the goods would bring more of the home coun- 
try's currency than before. Imports would be somewhat 
checked because the exchange on the other countries which 
must be purchased to pay for the goods would cost more of 
the home country's currency than before. This again 
would tend to stop the flow of gold. Finally, if long con- 
tinued, the loss of gold would tend to lower the general 
price level in the one country, and the gain of gold would 
tend to raise the general price level in the other country. 
This change in relative prices would tend to increase the 
exports of the country with the lower-price level and de- 
crease the exports of the country with the higher-price 
level. This change in the movement of trade would tend 
to shift the balance of international payments and check 
the outflow of gold. 

Of course, the operation of the correctives of the ex- 
changes is interfered with by the regulations which prevent 
the free movement of gold. 

10. Arbitrage. — ^In ordinary times, when the movement 
of funds is free, the exchange rates are kept in harmony with 
each other by the activities of a group of dealers in exchange 
called arbitragers. The manner in which they carry on 
their dealings is very technical, but a simple illustration in 
general terms will show how they make their profit and the 
effect of their operations. Suppose that the United States 
in its total trade has a favorable balance, that France has 
an unfavorable balance, but that in the particular trade 
with France the United States has an unfavorable balance. 



Foreign Trade and Foreign Exchange 277. 

That would tend to make, in the United States, exchange 
low on all of the countries except France, whose exchange 
would be high. Or to put it the other way, exchange on 
the United States would be low in France but high in all 
of the other countries. The exchange dealers would say 
that the rates were out of line, and so there would be a 
chance to make a profit by arbitraging. The operation 
might consist in buying dollars (New York exchange) in 
Paris with francs (Paris exchange) purchased in London 
with sterling (London exchange) and selling the dollars in 
New York for sterling with which to cover the sterling used 
in the purchase of the francs. This would yield a profit at 
first. But soon it would raise the price of dollars in Paris 
and lower the price of francs in New York. When the 
rates were in line, no profit could be made. 

II. Exchange Rates with Countries on a Paper Standard. 
— In Turner's Introduction, in the chapter on Money, we 
have seen that irredeemable government paper money 
usually depreciates in value. One of the ways in which this 
depreciation is measured is the depreciation of the ex- 
changes. That is, instead of being worth $4.86^, the 
English pound sterling in New York on the day quoted 
was worth only $3,893^. Part of the variation from normal, 
of course, might be due to variations in demand for supply 
of exchange, but most of it is due to the fact that England 
is really on a paper basis. 

Exchange rates with countries on a paper basis are sub- 
ject to wide fluctuations. Anything which affects the 
amount of depreciation of the paper money will affect the 
price of exchange. In Germany, repeated issues of paper 
marks have lowered the value of the mark. This shows 
itself in a low price of German exchange in other countries, 



^78 Jntroduction to Economic Problems 

and a hifj;h price of exchange on other countries in Germany. 
If !'■ ranee should balance her budget, the value of the franc 
would rise and with it the i)rice of exchange on Paris in 
New York. 

12. Exchange Rates with Countries with a Silver Stand- 
ard. — Silver is the commonest money in the Orient. The 
range of prices is so low that gold could not be used in or- 
dinary transactions. As was explained a])ove, there is no 
stable mint par. The price of exchange varies with changes 
in the demand for and supply of exchange and with the 
changes in the gold price of silver. During and since the 
war silver has varied greatly in price, from 52^ to $1.37 an 
ounce. Such ra])id variation introduces great uncertainty 
into dealings with such countries. 

13. The Gold-Exchange Standard. —The exchange on the 
rhilipi)ine Islands is an illustration of the situation which 
arises under what is called the gold-exchange standard. 
The theory of this standard is that the circulation within 
the country shall be made up of overvalued silver coins; 
and that these coins shall be kept at a certain par with 
the money of the gold-using country by an arrangement 
whereby at any time (he silver may be used to purchase 
exchange on the gold-standard country at a certain fixed 
price; and also, that at any time exchange on the gold- 
standard country may be turned into silver coins at the 
])rescribed ratio. The quotation as given above for the 
riiilipi)ine Islands re])resents a breakdown of this system. 
Adequate funds were not carried, and so there came a 
time when exchange could nol be purchased at the fixed 
ratio. The fact that the quotation is below par in New 
York means that in the Philippines it is above par. That 
is, it takes more silver pesos (Philippine money) to get a 



Foreign Trade and Foreign Exchange 279 

dollar than was contemplated when the system was 
started. 

14. The Regulation of Gold Movements. — ^We have seen 
above in considering the correctives of the exchanges, that 
there is a more or less automatic regulation of the movement 
of gold which occurs over long periods as the result of 
changes in interest rates and price levels. In this section, 
we wish to consider the more artificial short-time regula- 
tions used to prevent an outflow of gold. These measures 
are ordinarily undertaken by the central banks of the vari- 
ous countries. We are now referring to the time before 
the war. 

Since gold is the basis of the banking and credit systems 
of the leading commercial nations, a sudden withdrawal of 
a considerable quantity of gold might force rapid contrac- 
tion and possibly bring on a panic. The Bank of England 
used to save out the sovereigns, which were light weight 
but not too light to be current. If they wished to dis- 
courage the export of gold they would pay out these to the 
would-be exporter of gold. Since the gold is taken by 
weight in international shipments, the shortness in weight 
might be enough to cause it to be unprofitable to export 
the gold. 

However, the chief method used by the Bank of England 
to prevent the export of gold was to raise the discount 
rate. This attracted funds to London for investment and 
so changed the balance of international payments. 

The Bank of France under the law might redeem its 
notes in silver as well as gold. If it wished to prevent the 
export of gold it would pay out silver, or charge a premium 
for gold. 

Another method used on the Continent was to hold in 



280 Introduction to Economic Problems 

the portfolio of the bank a considerable quantity of bills 
on London, renewing them as they came due. If the ex- 
changes became adverse, they could often be corrected by 
throwing these bills on the market. 

15. The Effect of the War on the Exchanges. — The war 
caused profound changes in the course of trade and brought 
intergovernmental credit transactions of unprecedented 
magnitude. The governments interfered more than ever 
before with economic and financial matters. One of the 
early steps taken in most countries was to take control of 
the gold within the country. No gold could ordinarily be 
exported except on government account. Most of the 
countries stopped the redemption of their paper money 
and entered on a policy of inflation. The result is seen in 
the variation from par of the exchanges of the various 
countries. 

16. Dollar Exchange. — Before the war, sterling exchange 
was the chief instrument used in settling international 
obligations. Its primacy depended upon several circum- 
stances. British trade was world-wide. That meant that 
people all over the world who bought British goods had 
obligations to meet in London. This furnished such a de- 
mand for sterling exchange that those who sold goods to 
the British were willing to take sterling exchange in pay- 
ment. A second consideration was that Great Britain 
early adopted the gold standard and managed its monetary 
and banking affairs with such prudence that sterling ex- 
change was always the equivalent of gold. Again, Great 
Britain was a wealthy nation with capital seeking invest- 
ment abroad, so London bankers financed much of the com- 
merce of the world. That meant that the London discount 
market would absorb the sterling bills drawn against the 



Foreign Trade and Foreign Exchange 281 

shipment of commodities, also that foreign loans could be 
floated in London. 

We see then the conditions under which dollar exchange 
might supplant sterling exchange and New Yo^k take from 
London the financial leadership of the world. 

New York is a free gold market and London is not. The 
United States is the wealthiest country of the world. We 
are making some foreign investments, but our people are 
not used to foreign securities and will not buy them freely. 
Neither have we developed such a wide-spread world trade 
as Great Britain has. Dollar exchange will probably keep 
the supremacy so long as we are the only free gold market, 
and after that it will be a question of how rapidly our trade 
develops and how extensively we are willing to engage in 
foreign financing. 

Besides the sentimental reason for wishing to have our 
monetary unit used in world trade, there are other advan- 
tages. The use of dollar exchange throws on the foreigner 
the risk of exchange. Suppose an American sells cotton 
to some one in Liverpool on three months' time. If the 
transaction is carried on in terms of sterling, the amount 
the American receives depends on the price which he can 
get for his sterling in three months (of course, he may dis- 
count his bill, but that merely shifts the risk to some one 
else). On the other hand, if the transaction is carried on 
in dollars, the American knows exactly what he will receive 
but the man in Liverpool will not know how many pounds 
sterling it will take to meet his bill until the time of pay- 
ment. Obviously, it would be to our advantage to get 
rid of the risk of exchange. 

The second advantage of the extended use of dollar ex- 
change would be that our bankers, instead of the London 



^^84 I iilnxlKclion io lu'onoinir Prohlnns 

hanlvfis, would in;iki> a piolil on llu' mmu'rous linaucial 
(ransailioiis. 

Bankers' ArcrfyhiNccs. Tlu'sc arise under commercial 
letters of credit. Let us suppose that a New York I'lrm 
wishes to buy olive-oil from a fum in Italy to which it is 
not known. It would ^'^c{ Irom a. well-known New York 
hank a letter of credit which would authorize the Italian 
dealer to draw, sa>', a ninet\' da>' draft on the New \\)rk 
hank upon the shipment of the oiK'e oil and wi)ul(l agree 
ti)accei)t the draft. With this assuranii-, the Italian (l(>alcr 
would ship (he oil and I'^cl a hill of ladiu}^. lie would draw 
his draft on Ihe New \'ork hank and attach the hill of 
hulinjj; and other docuincnis to it. IIi' would sell the draft 
to his hank and thus ,i;e( tlu' moiu-y for his oil. VUc Italian 
hank would send the draft to its New \'ork corrc^spondent 
to |i;e( the ari'epl.ance of the New \'ork hank. 'Vhcu the 
draft mij^ht he held to malurity or discounted in order to 
get the proceeds at oiu c When tlu'draft is accepted, the 
accepting hank gets llu- hill of lading. It may allow the 
importer Io get Ihe goods under a (rust receipt or some 
otluM- li'gal device. When the drafi comes due, the money 
to pay it is i)rovided, of ct)ur.se, hy the importer, not the 
accepting hank. 

Hefore the war, most of llu' letters of credit were drawn 
on London hanks. The ,\nierican im])orter was forced to 
get his hank to arrange with its London correspondent for 
the lei liM- of credit. Of t()urst\ the Lt)ndon hankers charged 
for tlu-ir ser\'ici>s. 

Now we hope that .Vnieriian hankers will issue the com- 
mercial leltiMs of cnulil hoth for our own traders and those 
of other countries. 

Hankers' acci^plani'cs may also hi> usi'd \o liname exi>orls. 



Foreign Trade and Foreign Exchange 2Hf} 

17. Exercises. — i. What are the advantages of interna- 
tional division of labor? 

2. How may our desire to develoj) ])roductive capacity 
influence our attitude toward international division of 
labor ? 

3. Give other illustrations of the three kinds of trade. 

4. How does foreign trade differ from domestic trade? 

5. How much permanence may wc expect from each of 
the three kinds of trade? 

6. How does foreign exchange differ from domestic ex- 
change ? 

7. List the various items in the demand for and sui)])ly 
of foreign exchange. 

8. How would the price of sterling exchange in New 
York be affected by: 

(a) An increase in the exports of Great Britain? 

(b) An increase in the imports of Great Britain? 

(c) The fall of the Bolshevist government in Russia? 
{(l) The retirement of the ICnglish treasury notes? 
(e) The prompt payment of the German indemnity? 
(/■) A long-continued coal strike in (ireat Britain? 
(g) A capital levy in Great Britain? 

(h) General crop failures in Europe ? 

(i) Rapid recovery of industry in Europe? 

9. Explain how the mint pars are computed. 

ID. Why does there not seem to be much significance to 
the gold points at the present time? 

11. What bad effects on trade does the rapid fluctuation 
of exchange rates bring? 

12. Which is more important, to have stability of ex- 
change rates or to bring the rates back to par? Can both 
things be done at the same time ? 

13. What is meant by purchasing-power parities? 

14. Explain the effect of depreciated exchanges on the 
trade of a country. 



284 Introduction to Economic Problems 

15. Trace the effect of the payment of an indemnity by 
Germany on German exchange rates, trade balances, and 
productive capacity. 

16. What is the profit in arbitrage? 

17. What good effect does arbitrage have on exchange 
rates ? 

18. List the correctives of the exchanges in the order in 
which they operate. 

19. List the added factors which enter into the deter- 
mination of the exchange rates of a country on a paper 
basis. 

20. Give some account of the silver exchanges during 
the war and the reasons for the broad movements. 

21. How does the gold-exchange standard seek to sta- 
bilize the exchange rates on silver-using countries? 

22. What caused the breakdown of the gold-exchange 
standard in the Philippine Islands? 

23. Explain how central banks aim to control gold move- 
ments. 

24. How permanent can the effect of such measures be ? 

25. What difficulties will the Federal Reserve Board 
face in attempting to control gold movements ? What ad- 
vantages will it have? 

26. What has caused the growth in the use of dollar 
exchange ? 

27. What advantage would it be to traders in the United 
States if dollar exchange became widely used ? 

28. What interest has New York City in the spread of 
the use of dollar exchange ? 

29. Will dollar exchange supplant sterling exchange in 
the world's trade ? 



CHAPTER XVII 

TARIFFS AND FOREIGN TRADE POLICIES 

I. What Is a Tariff ? 2. Technical Terms of a Tariff. 3. The Effect 
of a Tariff on Imports. 4. Revenue Tariffs. 5. Protective Tariffs. 
6. Free Trade vs. Protection. 7. The Course of a Tariff Bill in the 
United States. 8. The Political Evils of a Tariff. 9. The History of 
the Tariff in the United States, Illustrating the Arguments Used — 
Infant Industry in the General Form — War — Home Market — Export 
Tax — Unconstitutionality — Wages — Infant Industry in Particular 
Form — High Cost of Living. 10. The Tariff Commission. 11. The 
Present Discussion. 12. The Problem of Dumping. 13. The Tariff 
and the Debts Owed Us by Europe. 14. Discriminations and Unfair 
Competition in Foreign Trade. 15. Reciprocity Treaties. 16. Co- 
lonial Preference. 17. The Open Door. 18. Exercises. 

1. What Is a Tariff? — Tariffs or duties are taxes levied 
on goods which move in international trade. They may 
be levied on the import or the export of the commodities. 
Usually a country with little industrial development but 
with valuable natural resources will levy export duties. 
Thus, Mexico and Chile have raised revenue with this type 
of duty. Most of the duties, however, are levied on the 
import of the goods into the country. Indeed, the United 
States Constitution prohibits the levying of export duties. 

2. Technical Terms of a Tariff. — A specific duty is one 
levied as so much per physical unit; as so much per dozen, 
per pound, per yard, or per quart. 

An ad valorem duty is levied as so much of the value, as 
25 per cent of the value. 

A tariff schedule is a grouping of rates on related articles. 
In recent tariff bills in the United States, Schedule A has 
been Chemicals; Schedule K, Wool and Woollens. 

285 



286 Introduction to Economic Problems 

A mixed duty combines specific and the ad valorem duties 
on one article. 

A compensating duty is that added to the duty on a manu- 
factured article to make up for the duty levied on the raw 
material used in the manufactures. 

A revenue duty is one levied primarily for the purpose of 
raising revenue. 

A protective duty is one levied primarily for the purpose 
of shielding the domestic producer from the competition 
of foreign producers. 

3. Effect of the Tariff on Imports, — The effect of a tariff 
duty on the price of the article depends on a variety of 
circumstances: such as, whether the article is produced 
within the country or not; if it is produced, whether the 
production is great enough to supply the domestic demand; 
whether the country is the chief market of the foreign pro- 
ducer or not; and whether the demand of the consumers 
is elastic or inelastic. 

Some of the cases are quite simple. Suppose we con- 
sider a duty on tea. There is practically no tea produced 
in the United States. A duty of 10^ a pound would prob- 
ably raise the price in the United States by 10^. The de- 
mand for tea is relatively inelastic; that is, an increase of 
10^ a pound in price would cause little falling off of the 
amount used. While we use a considerable amount of 
tea, we are by no means the sole or principal market for 
tea; so, if we refused to take as much as usual, the tea would 
go to other countries. 

The opposite extreme is the case of an article which we 
produce in such quantities that we not only supply the 
home market but also have a surplus for export. What 
would be the effect of a duty of 25 ji a bushel on wheat ? In 



Tariffs and Foreign Trade Policies 287 

general, it would have no effect on the price of wheat. It 
might upset some of the trade along the Canadian border. 
Canadian wheat is often milled in the United States and 
often shipped to Europe by way of this country. The duty 
might hamper this trade, as shipping in bond involves cer- 
tain formalities. But it would have no effect on the price 
of wheat, for it does not alter the relation of the supply of 
wheat to the demand for wheat. The intermediate case 
presents the greatest difficulty. If high duties are levied 
on an article which is produced within the country, the for- 
eign price plus the duty sets a maximum above which the 
domestic price cannot go, for foreign goods can be sold at 
that rate. If we assume that the product is produced by 
competing producers, the domestic price may be very much 
less than the foreign price plus the duty. 

4. Revenue Tariffs. — The tariff as it existed in Great 
Britain before the war is a good illustration of a revenue 
tariff. It was levied on comparatively few articles, and, 
in case they were produced within the country, an internal 
duty equivalent to the tariff was levied on the home pro- 
duction. Thus, there was no element of protection. 

The choice of articles of revenue tariffs is comparatively 
simple. Those articles will be chosen which are widely used 
and for which the customers have a rather inelastic demand. 
Sugar, coffee, and tea are good articles to tax from this 
standpoint. 

The rate charged will depend partly on what is found to 
be the rate which will yield the largest revenue and partly 
on the taxation policy. The tariff on the articles which are 
widely used would throw the burden of taxation largely on 
the poorer classes. For this reason, a rate lower than the one 
which would yield the highest revenue might be put in force. 



288 Introduction to Economic Problems 

5. Protective Tariffs. — Here the aim is not revenue, but 
the hindering of imports. We have seen that the import 
duty ordinarily raises the price of the article on which it is 
levied. This increase in price of the foreign article enables 
the home producer to compete on more advantageous terms 
with the foreign producer. If the duty is put extremely 
high, it may be that the foreign article will be entirely kept 
out. The protective tariff aims to cause some readjust- 
ment in the distribution of the labor and capital among 
the industries of the country. 

6. Free Trade vs. Protection. — The argument for free 
trade is based on the idea that international division of 
labor is desirable because it promotes the maximum pro- 
duction of goods. There is also the further idea that 
business men if left to themselves will pick out the most 
profitable employment for their labor and capital. The 
free-traders object to any interference with individual en- 
terprise. It is the doctrine of laissez-faire applied to for- 
eign trade. In political discussions, the free-traders com- 
plain that the tariff raises prices and thus increases the 
cost of living, favors one industry at the expense of others, 
and promotes trusts. 

We will take up the protectionist argument more in de- 
tail in connection with the history of the tariff in the United 
States; but in general the protectionists admit that prices 
of protected articles are raised, but insist that compensat- 
ing advantages are gained in the increase in productive 
capacity, in the development of a new industry, or in the 
safeguarding of an industry which is wanted in time of 
war. 

7. The Course of a Tariff Bill in the United States. — 
According to the United States Constitution, the tariff bill 



Tariffs and Foreign Trade Policies 289 

must originate in the House of Representatives. The party 
in power has a majority of the members on the various 
committees. The majority members of the Committee on 
Ways and Means usually frame the tariff bill. Usually, 
hearings are held by the committee. Most of the testimony 
is offered by the representatives of industries which want 
protection. There is very little representation of the in- 
terests of the consumers. The importers usually try to 
get lower rates. The bill is introduced by the chairman 
of the Committee of Ways and Means, and of course re- 
ferred to his committee. It is reported back from the 
committee with a majority report recommending its adop- 
tion and a minority report pointing out the bad features 
of the bill as seen by the political party out of power. 
Members of both parties make long speeches for and 
against the bill, frequently with the idea that the speeches 
will be useful in the next campaign. The bill may be taken 
up schedule by schedule. Amendments may be offered, 
but usually they stand little chance of being adopted unless 
approved by the committee. The rules of the House of 
Representatives permit limitation of debate, and so fre- 
quently the bill is brought to a vote with reasonable quick- 
ness. 

After the bill has passed the House of Representatives, 
it goes to the Senate. Here it is referred to the Finance 
Committee. The committee may hold hearings. It works 
over the bill, frequently making many changes. It reports 
out the bill with a majority report in favor and a minority 
report against its passage. In the Senate, because of the 
lack of effective means for checking debate, the progress 
of the bill is slower. Amendments from the floor have 
more chance of adoption. Finally, it passes the Senate. 



290 Introduction to Economic Problems 

Then it is sent back to the House. The House usually re- 
fuses to concur with the Senate amendments, so the bill is 
sent to a conference committee made up of members of 
both the House and the Senate. This committee arranges 
some compromise and reports it back to the House and 
the Senate. Ordinarily the bill as changed by the con- 
ference committee is passed by both houses. It then goes 
to the President for his signature. 

8. The Political Evils of the Tariff.— The tariff has pro- 
moted sectionalism. The various sections have voted, 
not on the basis of what would be best for the country as a 
whole, but on the basis of the effect the bill would have on 
their particular sections. 

There has probably been little direct corruption. But 
the protected industries through campaign contributions 
have had great influence on legislation. In general, it is 
well to avoid as much as possible legislation which is of 
direct pecuniary advantage to individuals. 

The Senate has been a fertile field for "log-rolling." 
Here the smaller states have the same representation as 
the larger. A group may be formed, large enough to con- 
trol the vote, each member of the group agreeing to sup- 
port the other in the demand for certain duties for his 
constituents as the price of his support of the bill. 

9. History of the Tariff in the United States, Illustrating 
the Arguments Used. — In our treatment of the arguments 
for and against protection, it will be helpful to follow briefly 
the development of manufactures in the United States and 
to attempt to indicate the conditions which gave rise to 
the arguments. 

In the colonial policy of England, the mother country 
was to manufacture and the colonies were to provide the 



Tariffs and Foreign Trade Policies 291 

raw materials. The Revolutionary War forced the colonies 
to manufacture, but at the conclusion of peace the goods 
from England once more gained the market. The failure 
to gain satisfactory trading agreements with England 
brought a very definite trend toward manufacturing. Ex- 
periments were made with the new power machinery in 
the textile industry. This was the situation when the first 
tariff act was passed. 

In 1789, shortly after the new government under the 
Constitution replaced the government under the Articles 
of Confederation, the tariff was enacted. The new gov- 
ernment needed funds. The people of the country did not 
relish any sort of direct taxation, so the tariff appealed to 
them because it was indirect taxation. The rates in the 
bill ranged from 5 per cent to 15 per cent. Although the 
bill was primarily for revenue, there was some clearly ex- 
pressed protective sentiment. The best formulation may 
be found in the Report on Manufactures presented to Con- 
gress by Alexander Hamilton in 179 1. He presents among 
others the Infant Industry Argument for Protection in the 
General Form. He discusses the problem of an agricul- 
tural country which wishes to develop manufactures at a 
time when other countries have already developed them 
on a large scale. It will be remembered that the indus- 
trial revolution occurred in England following 1750 and 
that there the factory system was first firmly established. 
The United States had been an agricultural country which 
had produced some raw materials for manufactures; but 
now the problem was, how could it, in competition with the 
well-established industries of Great Britain, start on a 
career of manufacturing ? Hamilton recognized that those 
who wished to start manufactures in the United States 



292 Introduction to Economic Problems 

would be under certain severe disabilities. They would be 
under the necessity of training a labor force. They were 
unfamiliar with the machinery used in the industry. Eng- 
land was attempting to keep as a monopoly the new proc- 
esses. To compensate for all of these disabilities, the home 
manufactures might be given a bounty, or a tariff be levied 
which would enable him to charge a higher price for his 
product than that for which the article could be imported. 
Hamilton thought that a protective tariff was the most 
satisfactory method to promote the development of manu- 
factures. 

We call this the general form of the Infant Industry argu- 
ment because all of the industries need the protection. 
The tariff is to assist the country in making the transition 
from a purely agricultural economic organization to one in 
which manufactures would play a part, though not neces- 
sarily the most important part. The advantage gained is 
an increase in productive capacity. The resources of the 
country and the capabilities of the population are better 
utilized. Assuming that the country is fitted for manu- 
factures, it is wise to pay more for manufactured goods for 
a time in order that the country may develop its productive 
capacity. 

Not much came of the movement to develop manufac- 
tures at this time because of the shift in the international 
situation. The French Revolution and the wars which 
followed it gave the United States a chance to engage in 
the very profitable business of raising food to sell to the 
belligerents and to develop the carrying trade. The su- 
perior attractions of agriculture and shipping caused manu- 
factures to be neglected. From 1790 to 1808, there were 
ten bills passed, raising particular rates and adding new 



Tariffs and Foreign Trade Policies 293 

articles. The changes are explained usually by the need 
of the government for additional revenue. 

The interference with our trade by France, in the Berlin 
and Milan decrees, and the British Orders in Council ham- 
pered the war business. Then the United States Embargo 
Act of 1807 and the Non-Intercourse Act of 1809 turned 
the attention of our people again to manufacturing. 

After the War of 181 2 was declared, all tariff duties were 
doubled. The revenue received was only about one-half 
of what it had been. The war stimulated home industries, 
and when it was over the owners of the industries de- 
manded protection against the flood of European goods. 
In the discussion, what may be called the War Argument for 
Protection was prominent. This argument may be briefly 
put as follows: No country should be dependent on other 
countries for the means of defense or for those commodities 
which satisfy the primary wants of individuals. The argu- 
ment was applied to the development of the iron and tex- 
tile industries. In some other countries it has been used 
with reference to food. In 18 16 a protective act was passed. 

The next phase of the discussion brings forward the 
Home Market Argument. Henry Clay as part of his 
"American System" included protection for manufactures. 
He argued that the War of 181 2 had shown the unreliability 
of the foreign market for our agricultural produce. What 
we needed to do was to develop manufactures as a market 
for our produce. He hoped to attract foreigners to work 
in the factories and so increase the population of the United 
States. He maintained that a home market was steadier 
and more secure. Ultimately, the quantity of manufac- 
tures produced would be increased and the prices lowered. 
This argument was addressed primarily to the Middle 



294 Introduction to Economic Problems 

States and the West. The Act of 1824 was a protective 
one raising rates. 

The tariff Act of 1828 was called the "Tariff of Abomina- 
tions." It raised some rates and included provisions dis- 
tasteful to the protectionist states, yet they voted for it as 
being on the whole desirable. In 1830, a few of the abomi- 
nations were corrected. The remainder were corrected in 
1832. In the South, about this time, active opposition to 
protection was aroused. The grounds of complaint are 
summed up in the Export Tax Argument against Protection. 
McDuffie, in his speech in 1830, reasoned that imports are 
paid for by exports, and so any tax levied on imports acts 
just the same as a tax on exports. The South with its 
cotton and rice provided about two- thirds of the exports. 
Therefore, McDuflie argued that the South was paying 
about two-thirds of the expenses of the government. We 
would not agree with his analysis that it was the owners of 
the exporting industries who really paid the tax. The con- 
sumers of the articles imported were the ones who paid the 
tax. 

The bill of 1832 was the one which South Carolina at- 
tempted to nullify. The result was the compromise tariff 
of 1833, which reduced all of the rates to 20 per cent by a 
series of changes covering nine years. Most of the reduc- 
tion came in 1842. For a short time in 1842 we had the 
novel tariff with a uniform 20 per cent rate. However, the 
same year a protective bill was passed. 

In the discussion preceding the bill of 1846, much was 
made of the argument of the Unconstitutionality of the 
Protective Tarif. This is set forth in its most elaborate 
form by Walker, who was secretary of the treasury at the 
time. It was a time when strict construction of the Con- 



Tariffs and Foreign Trade Policies 295 

stitution was popular. Walker said that Congress has 
the right to levy duties to raise revenue. If the rate of 
duty is higher than the rate which would give the maximum 
revenue, obviously, the purpose of the duty is not to raise 
revenue but to accomplish something else, and so the duty 
would be unconstitutional. With the passing of the strict 
construction of the Constitution, this argument is seldom 
heard. 

Another argument used at this time was the Wages Argu- 
ment for Protection. Hamilton had said that the high rate 
of wages in this country was one of the obstacles the manu- 
facturers had to contend with in starting new industries. 
After the protected industries had grown, it was evident 
that, at least in some of them, the ability to pay high wages 
depended on the existence of the protective tariff. It was 
a simple, though illogical, step to conclude that protection 
was responsible for the high general level of wages in the 
United States. We have seen in Turner's Introduction, 
page 456, that high wages arise from high productivity. 
We explain the high wages in the United States as being 
the result of our vast natural resources, the intelligence 
and industry of our population, the skill of our entre- 
preneurs, and the great amount of capital which we use 
in production. If we take an industry in which we have 
no natural advantage, but which, on the basis of the war 
argument, we have decided to protect, then we may say 
that the wages paid in that particular industry do depend 
on protection. 

The Act of 1846 lowered duties, though the duties were 
still moderately protective. A surplus of revenue led, in 
1857, to a reduction of about 20 per cent in all of the rates. 
Then came the Civil War. The Morrill Act of 1861 was 



296 Introduction to Economic Problems 

not really a war tariff, though it was passed after the war 
had started. It was a protective act. During the war, 
the tariff rates were greatly raised. When internal revenue 
duties were levied, especially in 1862 and 1864, the tariff 
duties were increased to compensate the manufacturers. 
Also many new protective rates were added. 

After the war, the high rates were maintained. When the 
revenue increased, rates were lowered in 1870 on articles 
which were taxed for revenue, such as tea, coffee, sugar, and 
spices. In 1872, tea and coffee were made free and all other 
rates reduced 10 per cent. In 1875, this reduction was re- 
pealed. In 1883, the tariff had a revision by its friends. 
Not many rates were reduced and some were raised. In 
1890, the McKinley bill was passed. The agricultural re- 
gions had become somewhat restive under the tariff, so great 
show was made of protecting them. At that time we were 
heavy exporters of agricultural production, so the duties 
accomplished nothing for the farmers. Our industries were 
developing to the place where a foreign market was desired 
for them. To assist them in getting a foreign market, pro- 
vision was made for what was called ''tropical reciprocity." 
Sugar and hides were admitted free unless the country of 
origin did not treat us fairly, in which case duties were 
levied. One provision of the bill illustrates the Infant In- 
dustry Argument in the Particular Form. By this time our 
manufactures were pretty well developed, but we did not 
have a tin-plate industry. Here was an industry, it was 
argued, which needed protection to get it started. The 
duty was unusual in that it required the industry 
to show a certain growth or the protection would be 
withdrawn. 

The Act of 1894 is an interesting bill. In many political 



Tariffs and Foreign Trade Policies 297 

discussions it is blamed with causing the panic of 1893, 
which happened the year before it was passed. The Demo- 
cratic party were pledged to lower the tariff, but the Senate 
made the bill more protective. The campaign of 1896 was 
fought on the free-silver issue, but when the Republicans 
came in power they passed the Dingley Act in 1897. The 
Act was decidedly protective. Some rates were lowered, 
but others, such as silk, linen, and sugar, were raised. 
Elaborate provisions were made for reciprocity, but they 
were not effective because the Senate did not ratify the 
treaties which were negotiated under the provisions of the 
Act. 

The Dingley Act lasted longer than any other tariff act 
in our history. In 1909, another revision of the tariff was 
made by its friends, with the result that some rates were 
raised, some lowered, but the general level of rates remained 
about the same. The rates in the Act were minimums. 
If any country discriminated against us unduly, an extra 
duty of 25 per cent of the value of the article was levied on 
all goods from that country. In the hearings preceding the 
passage of this bill, a new attitude on the part of some manu- 
facturers was evident. They wished to develop their ex- 
port trade and they found that they were hampered by 
high cost of materials which they had to obtain from pro- 
tected industries. 

In 1913, we have the first thoroughgoing revision of the 
tariff since the Civil War. The Underwood bill lowered 
many rates, such as woollens, cottons, iron, and steel; and 
put hides, leather, shoes, wheat, flour, cattle, meat, wool, 
coal, and lumber on the free list. In spite of all these re- 
ductions, there was considerable protection in the bill. 
The principal argument in the campaign used by the Demo- 



298 Introduction to Economic Problems 

crats against protection was that the Tariff Caused the High 
Cost of Living. This proved to be a very telling campaign 
argument. The war gave the Democrats an explanation 
for the failure of the cost of living to drop. Most econ- 
omists agree that the tariff had little to do with the cost 
of living. In so far as they were talking of the general 
level of prices, most economists would explain the rise pri- 
marily as a result of monetary changes, such as the in- 
creased production of gold and the extension of banking. 
In so far as high cost of living referred to food costs, the 
explanation runs in terms of the disappearance of our free 
fertile land and the working out of the Law of Diminishing 
Returns in the historical sense. 

In 1920, the Republicans came into power. A special 
session of Congress was called. An emergency tariff bill 
was passed to protect the farmers. In the deflation of 
prices following the post-armistice period, the prices of farm 
products fell sharply, causing great distress in the agricul- 
tural regions. Some of the duties levied were: wheat, 35^ 
a bushel; wheat flour, 20 per cent; corn, 15^ a bushel; po- 
tatoes, 25^ a bushel; wool, 15^^ to 45^ a pound; and sugar, 
i.i6ji per pound for sugar of 75 degrees and .o4|!f for each 
additional degree. 

Besides the agricultural provisions, a section provided 
an antidumping duty equal to the difference between the 
offering price and the foreign-market value. Another sec- 
tion provided control of the import of dyestuffs, which 
practically amounts to prohibition. 

The bill as enacted was to remain in force for six months. 
The expectation was that before the expiration of six 
months a permanent tariff bill would be passed. However, 
no permanent bill was agreed upon at the special session, 



Tariffs and Foreign Trade Policies 299 

and so the life of the emergency bill was extended until a 
permanent tariff bill should be passed. 

10. The Tariff Commission. — Many people have argued 
that we ought to have a scientific tariff with rates adjusted 
to changing conditions by a commission of experts. It is 
idle to expect that Congress would be willing to give up 
its power of legislating on the tariff, and the change would 
require an amendment to our Constitution. There is, how- 
ever, a function which a tariff board or commission can 
perform. It can gather information and present it to 
Congress. The Tariff Board during President Taft's ad- 
ministration made comprehensive reports on the woollen 
and cotton industries. The present Tariff Commission 
dates from 19 13. It has made a glossary of all of the terms 
used in connection with the tariff and made many special 
reports, such as, on the aniline-dye and other industries 
started during the war, and on free ports. 

11. The Present Discussion. — ^At the present time, we 
have the Infant Industry argument applied to the aniline- 
dye industry. The United States is a great manufacturing 
nation. The argument in its general form would no longer 
apply, but in the case of this one industry which we desire 
to develop we apply the argument in the particular form. 
We say that the American manufacturers of aniline dyes 
are under certain disadvantages in the period after the 
war until they have developed the methods of manufac- 
turing; and, furthermore, that until they will have been 
able to get together a skilled labor force, they will need 
protection. 

To-day the war argument is most used in this country 
with reference to the aniline-dye and certain other so-called 
"key" industries. The connection of the aniline-dye in- 



300 Introduction to Economic Problems 

dustry with the war was a double one. In the first place, 
as a result of the isolation of Germany we were put at 
considerable inconvenience to find dyes for textile and 
other industries. We wished to provide against the re- 
currence of this situation. The second phase is more 
directly connected with the prosecution of a war. The first 
steps in making some types of explosives and in making 
aniline dyes are the same. Thus, we can quickly turn the 
aniline-dye factories into factories for the manufacture of 
high explosives should it be necessary. 

A third appeal for protection is the Bargaining argument. 
We are urged to enact protective legislation in order that 
we will have what the small boy would call "trading" stock 
when we come to bargain for tariff concessions from other 
countries; that is, people argue that if we do not have a 
tariff, if we permit other countries to send without hindrance 
their products to this country, then we have no way of 
making them give us concessions, but if we put a protec- 
tive tariff on various products, then we can get concessions 
by removing this tariff. 

12. The Problem of Dumping. — At the present time, 
dumping is a serious problem. We must distinguish a num- 
ber of things which may be called dumping. The first is 
the sporadic selling of surpluses abroad at lower prices than 
they are sold at home, with the idea of keeping the price 
in the home market somewhere near normal. 

The second is a continuous dumping which occurs ordi- 
narily when the home market is protected and when 
the industry at home is under the control of a monopoly. 
In the case of many German industries, there was control 
by a cartel. This cartel kept the price at home at a cer- 
tain profitable figure and sold surpluses abroad at low 



Tariffs and Foreign Trade Policies 301 

prices. This differs, of course, from the first case in being 
a permanent policy. This is of particular advantage when 
it is used to prevent the development of the industries in 
other countries. The cartel which controlled the aniline 
dyes would be able to sell in the United States at a rate 
which would prevent the development of the dye industry 
in the United States. 

13. The Tariff and the Debts Owed Us by Europe. — 
During the war, we loaned our allies about $9,600,000,000. 
In 1921, the interest due brought the sum up to over $10,- 
000,000,000. What we really loaned, of course, was food, 
munitions, and ships. The repayment would need to be 
in goods. So, it is argued that if we really wish to receive 
repayment, it will not do to have a tariff which will pre- 
vent, or greatly hamper, imports from Europe. Some have 
argued that it would be better to cancel the debts, for the 
goods sent in repayment of them would drive our producers 
out of business. In the transition period, there might be 
some trouble, but the final result would be that we would 
get some things by importation and our manufactures 
would be in the lines in which we possessed the greatest 
advantages. 

14. Discriminations and Unfair Competition in Foreign 
Trade. — This is analogous to the practices noticed within 
the country in the discussion of trusts and monopolies. 
One country may be favored over another. In the early 
days^ much of the tariff policy had a political aspect; thus, 
England wished to injure France in every way and so dis- 
criminated against her. Dumping and stealing of trade- 
marks have been very common. Sometimes sanitary regu- 
lations have been used to keep out the products of a given 
country. Germany from 1883 to 1891 kept out our pork 



302 Introduction to Economic Problems 

products on alleged sanitary grounds. Germany gave 
preference to Swiss cattle and discriminated against other 
countries by using the description "large dappled moun- 
tain cattle or brown cattle, reared at a spot at least 300 
metres above sea-level, and which have at least one month's 
grazing each year at a spot at least 800 metres above sea- 
level." 

Discriminations of a more open character will now be 
considered. 

15. Reciprocity Treaties.— From the standpoint of the 
contracting parties, these treaties seem to be the exten- 
sion of good- will in international relationships. From the 
standpoint of the outsiders, the treaty looks like discrimi- 
nation. In return for reductions of duties on certain 
articles in one country, the second country gets reductions 
on another group of articles when sent to the first country. 
We have an agreement with Cuba: we give Cuban sugar 
reduced rates when it comes into the United States and 
Cuba gives reduced rates on certain of our products when 
they are sent to Cuba. To the producer in Java this ar- 
rangement seems to be a discrimination. 

Many countries have treaties with other nations pro- 
viding for "most-favored-nation" treatment. In Europe, 
these treaties are interpreted to mean that any reduction 
granted to a country is automatically extended to all coun- 
tries with which "most-favored- nation" treaties have been 
negotiated. The United States has interpreted the treaties 
to mean that a similar reduction would be made for the 
other countries if they gave something in return. 

16. Colonial Preference. — The development of colonial 
possessions by the various powers has given rise to a prob- 
lem with reference to the trade of the colonies. Of course. 



Tariffs and Foreign Trade Policies 303 

in the early colonial days, the seventeenth and eighteenth 
centuries, the colonies frankly were treated as possessions 
of the mother country to be used or exploited in any way 
which was profitable to the mother country. We have 
advanced from this idea to the point where we insist that 
the interests of the colonies must be considered in the de- 
velopment of colonial policies. The question now is, shall 
the interests of other countries be considered in the de- 
velopment of the colonies? Has the mother country the 
right to the exclusive trade of the colonies, or if not the 
exclusive trade, has the mother country the right to de- 
mand that its trade be granted preferences over the trade 
of other countries? Great Britain has a great colonial 
empire. Many of the colonies give to goods from the 
mother country a lower rate than is charged when the 
goods come from other countries. A proposal for tariff 
reform in England suggested that protective tariffs be 
levied and the colonies be given preferential rates on food 
products. To some people, colonial preference seems to be 
a discrimination against outsiders. Thus, they would say 
that the Philippines should charge no higher rate on goods 
from Europe than on those from the United States. 

17. The "Open Door."— The phrase ''open door" im- 
plies equality of treatment to all nations, not only in tariff 
rates, but also in investment opportunities. It is applied 
to colonies. But, at present, the most important applica- 
tions are to China and to the regions held under mandates 
from the League of Nations. It does not mean that no 
duties will be charged, but that any duties levied shall 
apply to all equally. Many fear that, despite the provi- 
sions in the peace treaty about the "open door" in the 
mandated regions, ways will be found to hamper the trade 



304 Introduction to Economic Problems 

of other countries and to reserve the natural resources for 
exploitation by the country which holds the mandate. 

i8. Exercises. — i. Why are most tariffs levied on im- 
ports ? 

2. How are the tariffs in the United States arranged? 

3. Explain the different kinds of duties. 

4. Indicate under what conditions the foreigner can be 
forced to pay the tariff and under what conditions the 
consumer pays it. 

5. State the general ground of disagreement between 
free-traders and protectionists. 

6. Show concretely how a tariff may change the direc- 
tion of the application of the labor and capital of a country. 

7. Argue that a tariff can or cannot increase the labor 
and capital in a country. 

8. If left to individual enterprise, will the labor and cap- 
ital of a country always go into the industries which will 
most benefit the public? 

9. What is meant by an increase in the wealth of a 
nation? How does foreign trade help? 

10. If it pays a lawyer who is a good stenographer to 
spend all of his time at law and hire a stenographer, what, 
by analogy, would it pay a country to do which may pro- 
duce various things? 

11. Show how conditions in the United States led to the 
use of the various arguments for and against protection. 

12. Trace in broad outline the course of tariff rates in 
the United States. 

13. Show the fallacy of the wages argument for pro- 
tection. 

14. Follow the course of a tariff bill through the United 
States Congress. 

15. Illustrate what is meant by log-rolling. 

16. What are the political evils of the tariff? 

17. Under our present political system, what are the 
imitations on the activities of a tariff commission? 

18. What would be a scientific tariff? 



Tariffs and Foreign Trade Policies 305 

19. Outline as far as possible the present attitude toward 
the tariff of the following: the farmers, the consumers, 
manufacturers who wish to export, other manufacturers, 
bankers, the South, New England, the Middle Atlantic 
States, the Middle West, and the Far West. 

20. What is the effect of a tariff on wheat or raw cotton ? 

21. What is the objection to the practice of dumping on 
the part of consumers in the country which does the dump- 
ing? 

22. Illustrate unfair competition in foreign trade. 

23. What is a reciprocity treaty? 

24. Distinguish the European and American interpreta- 
tion of most-favored-nation treaties. 

25. Give examples of colonial preferences; to what ex- 
tent are they justifiable? 

26. What is meant by the "open door"? 

27. How, in practice, may the "open door" be nullified? 

28. What problems arise in connection with the control 
of raw materials? 



CHAPTER XVIII 

PUBLIC FINANCE 

I. The Scope of Public Finance. 2. The Sources of Public Revenue 
— Taxes — Fees — Public Prices. 3. Government Borrowing — War 
Debts. 4. Justice in Taxation — Benefit Theory — Ability Theory — 
Cynical Theory. 5. Rates of Taxation. 6. Incidence of Taxation. 
7. Government Expenditures. 8. The Budget — Advantages — New 
York City — New York State — Federal Government. 9. Exercises. 

1. The Scope of Public Finance. — The use of the term 
political economy by the early writers indicates the large 
place which public affairs held in their thought. It will 
be remembered that the mercantilists devoted themselves 
to questions of public policy, such as duties and regulations 
of foreign trade; and that in Germany a class of writers, 
called cameralists, studied the problem of public adminis- 
tration, especially the methods of raising revenue. 

Two aspects of the question demand our attention: 
First, where do the governing bodies get the money they 
spend? Second, for what purposes do they spend it? 

2. The Sources of Public Revenue. — At the present time, 
the receipts of governing bodies come mostly from taxes, 
loans, fees, and returns from government-operated utilities. 

Taxes are forced contributions to the expenses of the 
state. We shall see later that they are levied in numerous 
ways, but always there is the idea that the tax is a general 
contribution, not a payment for any specific service. 

Fees, on the other hand, are levied in connection with 
certain particular activities; such as recording deeds and 

306 



Public Finance 307 

other papers, and getting licenses. Here there is a cer- 
tain element of compulsion. Usually, mortgages must be 
recorded. The primary purpose is perhaps the public 
benefit; yet the person who pays the recording fee gets 
some direct benefit, and payment is made only when one 
needs the service. 

Public prices are defined as amounts paid by consumers 
for service rendered. For example, many municipalities 
own the water-supply system. The payment for the water 
is a part of the revenues of the city. It is obvious that 
there is no element of compulsion. One does not need to 
buy unless he wishes. Roughly, the price is set as other 
prices are, modified by the consideration that there is or- 
dinarily a monopoly and that frequently for public policy 
the price is kept down. 

3. Government Borrowing. — Government loans are short 
time or long time. The short-time loans are to cover 
deficits, and sometimes are issued in anticipation of tax 
collections. Nations frequently borrow from the central 
banks of the countries. Thus, the Bank of England loans 
the government on exchequer bills. In this country the 
Federal Reserve Banks loan the government on treasury 
certificates of indebtedness. 

The longer government loans arise from wars and from 
expenditures for improvements or the acquisition of in- 
dustries. The form of these loans is ordinarily the unse- 
cured bond. The buyers have confidence in the promise to 
pay of the issuing government. Bonds issued by back- 
ward countries are sometimes secured by a lien on the cus- 
toms or some other source of revenue. The Anglo-French 
5's, issued shortly before we entered the war, were unusual 
in being secured by collateral. The large part played by 



308 Introduction to Economic Problems 



war in the creation of indebtedness is all too plain to those 
who live to-day. The world is staggering under a burden 
of debt. 

DEBTS BEFORE AND AFTER THE WARi 
(In million dollars) 



Before War 


After War 


1, 208 


26,597 


3,458 


37,657 


336 


1,584 


93 


1,619 


446 


734 


6.598 


30,494 


3.031 


15,009 


1,261 


1,284 


5,092 


54,402 


722 


1,889 


188 


521 


1,165 


40,007 


2,631 


17,071 


1,602 


8,909 


667 


2,002 


171 


1,158 



United States. 
Great Britain. 

Canada 

Australia 

New Zealand . 

France 

Italy 

Japan 

Russia 

Belgium 

Greece 

Germany. . . . 

Austria 

Hungary 

Turkey 

Bulgaria 



Total. 



28,669 



HO,937 



' L. R. Gottlieb, Debts, etc., of Principal Belligerents, Quarterly Jaurnal of Economics, vol. 
34, November, 1919, pp. 164-165. 

In the United States, the Panama Canal was built largely 
by funds obtained from the sale of bonds. Abroad, when 
countries have acquired railroads or telephone lines, the 
payment has ordinarily been made by issuing bonds. In 
this country where states made improvements which are 
supposed to be long lived, the cost is paid by the sale of 
bonds. Thus, New York State sold bonds to modernize 
the Erie Canal. Many states are going in debt to build 
good roads. In the local governments we find bonds issued 
to build public buildings, to pave streets, to put in sewer 



Public Finance 309 

systems, to buy parks, and for other purposes. Sound 
finance in such cases demands that the bonds be paid off 
during the life of the improvement. Many cities are still 
paying interest, and have yet to pay the principal of bonds 
issued to finance improvements long since worn out. 
Where cities are fairly large, it is much better to follow, as 
did New York City for a while, the "pay as you go policy." 

4. Justice in Taxation. — The problem of justice in taxa- 
tion relates to the question of the apportionment of the 
tax burden. How much ought each to contribute ? There 
are two recognized theories and one which is implicit in 
much of the practice. 

Benefit. — One group urges that benefit should measure 
the contribution. The government provides certain ser- 
vices which should be paid for by the users. This theory 
is workable for certain services, say fire protection. The 
cost might be assessed on property-holders according to the 
value of their property with perhaps some scale of rating 
which took into account the variation in fire hazard. But 
how can we rate some of the services the goivernment per- 
forms ? What value is the system of justice to an individual 
who never in his whole life goes to court ? Is the talk about 
the inestimable advantages of our free institutions mere 
Fourth-of-July oratory? Again, many of the services of 
the government are for the benefit of those who cannot 
pay. The insane, the paupers, the sick who are cared for 
in public institutions, cannot pay for the benefits received. 
So the benefit theory does not seem to be workable. We 
would all agree that no money should be raised by taxation 
the spending of which does not benefit the public; but the 
amount of individual benefit cannot be used as the basis 
for levying the taxes. 



310 Introduction to Economic Problems 

Ability. — The second group urges that taxes should be 
levied according to ability to pay. Most people accept 
this theory; of course, all the time magnifying the ability 
to pay of all but themselves. Take the problem of a class 
in college raising funds, the problem of class taxation. 
For ordinary small things, the assessments are equal. The 
amount is so small that ability may be assumed equal. 
But suppose it is the question of raising funds for class gift 
to the school or a big donation toward endowment. Then 
the common feeling is that the more wealthy should con- 
tribute more than the poorer members of the class. 

Cynical. — The third theory finds few to defend it, but 
many to follow it in practice. It might be stated as fol- 
lows: the raising of taxes is a matter of practical politics. 
No one likes to be taxed. Our business is to provide the 
revenues to spend in the way which will cause the least 
outcry from politically powerful groups, without becoming 
sentimental about questions of justice. Thus, if indirect 
taxes raise revenue without the people realizing it, they are 
good taxes, even though they may be paid mostly by those 
least able to pay. 

Another point with reference to justice in taxation has 
to do with the problem of getting changes in the distri- 
bution of wealth through taxation. Taxation could be so 
used, if the people as a whole desired it, but on the whole 
the problem of inequahty had better be attacked more 
directly. Heavy taxation under the ability theory will 
doubtless make the distribution of wealth more uniform. 

5. Rates of Taxation. — Taxation may be levied on vari- 
ous bases. We may tax on wealth, income, consumption. 
In any case, we have the problem. Shall the rates be pro- 
portional, progressive, or regressive ? Suppose we are tax- 



Public Finance 311 

ing on income. Shall we say that all shall pay the same 
proportion of their income ? This we call proportional taxa- 
tion. Or shall we say that as a man's income increases he 
shall pay a larger proportion in taxes ? This is progressive 
taxation and the method actually used in the federal in- 
come tax. Or shall we say that the smaller the income 
the larger proportion shall be taken? This is regressive 
taxation. It probably would be defended by no one but 
is the result which follows the levying of a tax equal in 
amount on all taxpayers. Taxes on necessities of life also 
work out in practice as regressive taxes. Of course, we must 
consider the taxation system as a whole. It is the com- 
bined effect of all of the taxes which determines the justice, 
not the effect of one tax. 

6. The Incidence of Taxation. — Not all taxes are really 
paid by the persons on whom they are levied. We say 
they shift. The incidence of the tax is upon the persons 
who finally pay the tax. The problem of shifting is always 
a value problem to be solved in terms of demand and sup- 
ply. There is nothing automatic about the process. The 
shifting must come about through changes in prices. The 
problem is one of the most complex in economic analysis, 
and we can take only a few elementary cases, {a) A tax on 
land will not shift. The renter will not pay more for land 
merely because the owner is more heavily taxed. What he 
pays is the market price of the productive services of the 
land, and the tax has no effect on the demand for or sup- 
ply of land. (&) A tax on buildings will shift to the renter. 
The shifting may not take place at once. There may be 
a lease running for some time. The shifting takes place 
more or less rapidly, depending on whether the city is 
growing rapidly or not. The reason for the shifting lies 



S12 Introduction to Economic Problems 

in the necessity of getting investors to put up new build- 
ings to replace those wearing out, or to provide for the 
growth in population. This they will not do unless they 
get a certain net return. Thus, we see that by the limitation 
of supply the shifting takes place, (c) Taxes on articles 
produced under competitive conditions in the long run will 
be shifted to the consumer. The reasoning is similar to 
the case of buildings. The variation in time required to 
make the shift is a question as to the amount of capital in 
the business which cannot be utilized for some other pur- 
pose. But ultimately the plant will not be renewed, and 
so the supply will not be forthcoming unless the price covers 
the tax as well as the other costs, (d) A tax on the net 
profits of a monopoly will not shift. We have seen that 
the alert monopolist sets the price at the point which will 
yield him the greatest net profits. The levying of the tax 
reduces his profit, but raising the price would cause a loss. 
(e) A tax on a commodity produced by a monopoly may 
be shifted. We cannot be sure that it will be shifted until 
we know the conditions under which the article is produced 
and the shape of the demand curve for the article. But 
since the tax is levied on each unit produced, it may well 
be that the greatest net profit will be gained by selling an 
amount smaller than before, at a higher price. 

7. Government Expenditures. — The second problem of 
public finance is the problem of expenditures. In later 
chapters we shall see the various purposes for which the 
public money is spent. Here our interest is in the general 
principles which should underlie expenditures. Ordinarily, 
all the government spends it must get from the citizens. 
The problem then is just how much shall be done at pubhc 
expense for the good of all. The answer will depend on 



Public Finance 313 

the nature of the various services and the efficiency of the 
government. Historically, the trend has been toward gov- 
ernment taking over more and more functions. Adam 
Smith^ said duties of the government were: (i) to protect 
from violence and invasion without; (2) to protect individ- 
uals from injustice and oppression; (3) to erect and main- 
tain certain public works and institutions which individual 
enterprise will not undertake because it would not be 
profitable. Now we take a broader view. In the early 
days many roads and bridges were privately owned and a 
toll was charged for the use of them. There has been a 
steady increase in the amount of education furnished by 
the public; at first only primary schools, then high schools, 
and finally colleges and universities. The modern city does 
many things for the citizens which the village would not 
think necessary; such as garbage removal, the provision 
for recreation, public concerts, libraries, art museums, and 
hospitals. In many of these things we may say that doing 
them publicly gains the advantages of large-scale produc- 
tion. But we have, on the other hand, to contend with the 
inefficiency which comes from regarding offices as the spoils 
of politics instead of a public trust. Another problem has 
to do with the extent to which it is fair to tax one group 
to raise funds to expend for the benefit of another group. 
Thus, should New York City be taxed for expenditures 
which benefit primarily the remainder of the state ? 

8. The Budget.— In homely language, when a govern- 
ment has a budget system it attempts to act in managing 
its receipts and expenditures as a prudent man does. In 
the United States one of the fundamental principles of our 
governmental organization has been the "separation of 
1 Wealth of Nations, book IV, chap. IX. 



314 Introduction to Economic Problems 

powers." We have had executive, legislative, and judicial 
departments all independent. Even in the legislative de- 
partment, often different committees have looked after 
revenues and expenditures with very little consultation. 
Thus, we have ordinarily had little attempt to adjust ex- 
penditures to revenues. In general, we have been grow- 
ing rapidly in wealth and usually have had a surplus of 
revenue. Of course, this condition has led to extravagance; 
to pork-barrel legislation based on the plan of doing some- 
thing in the way of public buildings, or river and harbor 
improvements for each congressman and senator. Every 
one who desired something done, tried to get the federal 
government to do it. Thus, recently we have had federal 
aid for road-building and for vocational education. 

As the result of the great war, our federal expenditures 
have increased tremendously, and we must consider more 
carefully than ever before what we can afford to spend 
and how we shall raise the revenue. 

In the countries which have cabinet government, there 
is closer co-operation between the executive and legislative 
branches. The cabinet holds office so long as it commands 
the support of the legislative body, and it is chosen in the 
first place from the legislative body. The cabinet must 
present the budget which shows the proposed expenditures 
and the methods for meeting them. The opposition party 
then has its chance to criticise both the record of the gov- 
ernment and the new proposals. 

Advantages Claimed for the Budget} — (a) It is an instru- 
ment of democracy. It enables the people to understand 
what has been going on, and to control the government. 

1 W. F. Willoughby, The Movement for Budgetary Reform in the 
States, pp. 1-4. 



Public Finance 315 

(6) It correlates legislative and executive action. The 
budget gives larger responsibility to the executive in making 
and carrying out plans, but also gives the legislature better 
methods of holding the executive responsible for the results. 

(c) It secures administrative efficiency and economy. In 
a way, it is the application of modern business methods of 
accounting in governmental affairs. Each department is 
checked up. Its chance to get appropriations depends 
upon its record in the past. 

In the United States, considerable progress has been made 
in budget procedure in cities and states. Thus, in New 
York City the procedure is as follows: 

New York City} — The Department of Finance sends 
forms to all the bodies which get support from the city. 
On these forms are to be recorded actual expenditures in 
the past and estimates for the next year. These are sent 
out in the summer and returned in September to the De- 
partment of Finance. Examiners from this department 
work over the material presented and recommend appro- 
priations to the Board of Estimate and Apportionment 
(composed of the mayor, the comptroller, the president of 
the Board of Aldermen, and the five borough presidents). 
Hearings are held, at which department heads may defend 
their estimates and the examiners defend their suggestions. 
What is decided on is called the "tentative budget." Next 
public hearings are held, and any taxpayer may suggest 
changes. As a result of the hearings, the budget may be 
revised. It must be passed before November ist. Next, 
it goes to the Board of Aldermen, which can reduce but 
not increase items. They have twenty days to deal with 

^ Munro, Principles and Methods of Municipal Administration, pp. 
447-449. 



316 Introduction to Economic Problems 

it. When passed by them, the budget goes to the mayor, 
who may veto their amendments. Unless the aldermen 
by a three-fourths vote override the mayor, his veto means 
that the original item replaces the amended item. Finally, 
after adoption, the budget is certified by the mayor, comp- 
troller, and the city clerk and the amounts indicated are 
appropriated. 

This budget illustrates the type which attempts to con- 
trol administration by requiring minute specification of 
the purposes for which amounts are asked. 

The Budget in New York State. — New York has not 
adopted the budget in the full sense. Its budget may be 
called a legislative budget. The governor within a week 
of the start of the session sends to the legislature a state- 
ment of appropriations desired by each state body or in- 
stitution which gets money from the state. The governor 
may suggest additions or reductions. He may also give 
estimates of probable revenues for the year. The Finance 
Committee of the Senate and the Ways and Means Com- 
mittee of the Assembly prepare and submit a budget con- 
taining complete and detailed statement of all appropria- 
tions. They also make an itemized and detailed estimate 
of probable revenues and the amount of direct tax neces- 
sary. The law provides for the presentation of the budget 
in the form of an appropriation bill and specifies the proce- 
dure to be followed in its passage. The meetings at which 
the appropriation bills are considered are open to the public. 
On the third reading, reductions may be made, but no in- 
creases are permitted except by unanimous consent. 

The Federal Budget.— Ahav many years of eflfort, the Con- 
gress has finally passed a plan for a budget. The law was 
effective July i, 1921. It is an executive budget prepared 



Public Finance 317 

for the President by a bureau in the Treasury Depart- 
ment. 

The new procedure for the federal government is laid 
down in the Budget and Accounting Act, 1921, which was 
signed by the President on June 10, 1921. The President 
is made responsible for reporting the budget to Congress. 
He sends Congress at the beginning of the regular session 
a budget which shows : 

{a) The condition of the Treasury at the end of the last 
fiscal year, and the estimated condition for the year in 
progress and for the following year if the proposals of the 
budget are carried out. 

{h) The revenues and expenditures of the federal govern- 
ment for the last fiscal year and the estimated revenues 
and expenditures for the current year. 

{c) The President's suggestions for revenues and ex- 
penditures for the ensuing year. 

{d) Any information which will help Congress in decid- 
ing on the administrative and financial policies of the 
government. 

In effect, this budget will combine a report of how the 
government has been conducted and proposals for con- 
ducting the government in the future. 

The start in making the budget will be the requests of 
the various departments for appropriations. The Presi- 
dent, however, must use his judgment in submitting these 
requests in the budget, since he assumes responsibility for 
asking for the money when it is included in the budget. 
It will be the President's duty to suggest that funds be 
given to the various departments in such a way as to in- 
sure economy and efficiency. Of course, the President 
cannot do this in person, so the Bureau of the Budget is 



318 Introduction to Economic Problems 

provided to assist him in formulating the budget. This 
bureau is presided over by a director, who is in a sense the 
President's personal representative. The director is not 
limited to passing on the requests of the various depart- 
ments and bureaus. He may make suggestions about 
changes in organization or activities to promote efficiency. 
This Bureau of the Budget is nominally a bureau of the 
Treasury Department, but the secretary of the treasury has 
no control over it. The director is responsible directly to 
the President. The budget when it comes to the House 
will, by amendment of the rules of the House, be handled 
as a single programme. This is a great advance over the 
previous system in which many committees worked inde- 
pendent of each other and made a general financial pro- 
gramme almost impossible. Just as the individual must 
decide between certain competing avenues of expenditure, 
so Congress refuses many things, not because they are not 
good in themselves, but because the limited amount of 
money available for appropriations makes it necessary to 
choose those things which are more important. 

The part of the Act referring to accounting makes pro- 
vision for an independent examination and audit of all 
government expenditures. The Act provides for a comp- 
troller-general of the United States to head an independent 
accounting office which will take over the duties performed 
by the comptroller of the treasury and the six auditors of 
the Treasury Department. The comptroller-general is 
given permanent tenure of office. He may be removed 
only on impeachment or by joint resolution of Congress 
when it decides that he "has become permanently inca- 
pacitated or has been guilty of neglect of duty, or of mal- 
feasance in office, or of any felony or conduct involving 



Public Finance 319 

moral turpitude." The one idea back of the change is to 
replace the audit which previously was interested merely 
in whether the technical requirements of law had been ful- 
filled with one which aims to promote the efficiency of the 
administration of the government's financial affairs. If 
the comptroller-general performs his functions properly, it 
will not be necessary for Congress to hold periodic examina- 
tions as it does now into the activities of the various de- 
partments which receive funds from Congress. Too often, 
of course, these investigations have been for partisan pur- 
poses. 

This legislation makes possible, if Congress and the ad- 
ministration are willing to co-operate, a more efficient and 
businesslike conduct of our federal government. 

The following tables were sent to Congress on Decem- 
ber 5, 1921: 

9. Exercises. — i. Distinguish public and private finance. 

2. What sets the absolute limit on the amount that can 
be spent by an individual ? by a corporation ? by a govern- 
ment? 

3. What interest has the business man in public finance? 

4. What are the sources of government revenue? 

5. Distinguish taxes, fees, and public prices. How is the 
amount of each determined? 

6. Explain the methods used by the United States Gov- 
ernment to get short- time loans (less than one year). 

7. Contrast the principles which underlie prudent bor- 
rowing by an individual; by a corporation; by a govern- 
ment. 

8. Contrast the security back of corporation bonds and 
United States Government bonds. 

9. Why do not governments sell stock? What is meant 
by the stock of New York City? 



320 Introduction to Economic Problems 



BUDGET SUMMARY 

[Exclusive of postal revenues and postal expenditures paid from postal revenues) 



Total receipts 

Total expenditures, including reduction in principal of 
public debt , 



Excess of expenditures , 
Excess of receipts . . . . 



$3,338,182,750 
3.505,754,727 



$167,571,977 



1921, Actual 



$3-943.453.663 $5,624,932,960.91 
3,967,922,3661 5,538,040,689.30 



$24,468,703 



ESTIMATED EXPENDITURES FOR 1922 AND 1923 



Legislative 

Executive office 

State Department 

Treasury Department 

War Department 

Panama Canal 

Navy Department 

Interior Department 

Indian Service 

Pensions 

Post Office Department 

Deficiencies in postal revenues 

Department of Aijriculture 

Expenditures for j^ood roads 

Department of Commerce 

Department of Labor' 

Department of Justice and Judicial 

Shippiui^ Board and Fleet Corporation 

United States Veterans' Bureau 

Kailroatl Administration and Transportation Act . . 

Federal Board for Vocational Education 

Other independent offices, including^ War Finance ai 

Grain Corporations 

District of Columbia 

Increase of compensation 

Purchase of oblij,'ations of foreign Governments . . 

Purchase of farm loan bonds 

Deduct unclassified repayments, &c 

Ordinary expenditures 

Reduction in principal of the public debt: 

Sinking fund 

Purchase of Liberty bonds from foreign repayments 
Redemption of bonds and notes from estate taxes 
Redemption of securities from Federal Reserve Bank 

franchise tax receipts 

Total net reduction in principal of public debt . 

Investments of trust funds: 

Government life insurance fund 

Civil service retirement fund and District of Colu 

bia teachers* retirement fund 

Trust fund investments 

Interest on the public debt 

Total expenditures 



Estimated 

Budget 

Expenditures, 

1923 



$16,265,215 

227,045 

10,432.624 

168.997,160 

369.902.107 

7.358.839 

431.754.000 

41.799. 

31,883,000 

252,350,000 

3,357,092 

21,509,666 

47.497.530 

I 125,700,000 

19.939.970 

6,301,835 

18,415,681 

50.495.735 

455.232.702 

5.529,244 

17,034,583 
25,070,877 



$2,127,053,927 

$283,838,800 
30,500, 
25,000,000 

30,000,000 



$369,338,800 



$26,162,000 



Estimated 

Expenditures, 

1922 



$15,984,446 

227.045 

11.406,032 

169,871,163 

389,091,406 

7,219,849 

478,850.000 

35,005,829 

33,135,000 

258,400,000 

3,276,454 

48,172,270 

48,637.100 

1 105,000,000 

20,131,800 

4,796,916 

16,825,568 

73,911,081 

438,122,400 

337,679.235 

4.756.344 

16,983,165 
22,275,063 
35,000,000 



$2,574,758,166 

$272,442,200 
30.500,000 
25,000,000 

60,000,000 



$387,942,200 

$22,022,000 
8,200.000 



$34,362,000 



$975,000,000 



$3,505,754,727 



$30,222,000 



$975,000.0 



$3,967,922,366 



Actual 

Expenditures, 

1921 



$18,994,565.17 

197,341.68 

8,780,796.84 

476,352,192.21 

1,101,615,013.32 

16.461,409.47 

650,373.835-58 

39,687,094.86 

41,470,807.60 

260,611,416.13 

5.230.650.15 

130.128,458.02 

62.385,702.93 

57.452,056.48 

30,828,761.55 

8,502,509.55 

17,206,418.03 

130,733,268.26 



730,711,669.98 
104,671,772.62 



83.596.418.52 
22,558,264.16 



73,896,697.44 

16,781,320.79 

922,593.14 



$4,088,295,848.20 



$261,100,250.00 
73.939.300.00 
26,348,950.00 



$422,113,000.00 

$20,325,152.88 
8,161.956.87 



$28,487,109.75 



$999.144. 73'-35 



^$5,538,040.689. 30 



Excess of estimated expenditures over ordinary receipts, fiscal year 1923. ...-,... $167,571,977.00 

Excess of estimated expenditures over ordinar)' receipts, fiscal year 1922 24,468,703.00 

Excess of ordinary receipts over expenditures payable therefrom, fiscal year 1921. . . . 86,892,271.61 



■The above table includes estimates of additional expenditures during 1923 and 1922 for good roads, 
authorized by the Act of November 9, 1921. 



Public Finance 321 

10. Should bonds be sold by a city to pay current 
expenses? to buy parks? to pave streets? to erect a 
city hall ? 

11. How do weak governments add security to their 
bonds ? 

12. Is the matter of permanence of the investment the 
decisive factor in the question of whether bonds should be 
issued or whether the payment should be made from cur- 
rent revenue ? 

13. Should state and municipal bonds be exempt from 
taxation in the jurisdiction that issues them? 

14. Contrast the serial method of paying bonds with 
the sinking-fund method. 

15. What is the purpose of state laws limiting the bor- 
rowing power of cities ? 

16. State the cases where the benefit theory appeals to 
you as being fair. 

17. What difficulties arise in applying the ability theory 
of taxation? 

18. What is the theory of justice in taxation followed by 
most legislators ? 

19. Argue for and against using taxation as a method 
of changing the present distribution of wealth. 

20. Distinguish regressive, proportional, and progressive 
rates. To illustrate, give rates on incomes of $1,000, 
$8,000, and $10,000. 

21. Which rates would the benefit theory lead to? the 
ability theory? 

22. If we take equal ability to mean equal sacrifice, 
what would the Law of Diminishing Desirability indicate 
about the rate which should be used? 

23. Is the shifting of taxes undesirable? 

24. What is the fundamental difference between land 
and buildings which causes the difference in the incidence 
of taxes laid on them ? 

25. Is the tax on movies shifted? 



322 Introduction to Economic Problems 

26. Should a government adjust its expenditures to its 
revenues or adjust its revenues to its expenditures ? 

27. Why have government expenditures increased in the 
last century ? 

28. How much should a government provide in the way 
of education? recreation? music? 

29. What is the fundamental idea of the budget? 

30. What features of our form of government make the 
working of a budget difficult? 

31. What advantages are claimed for the budget? 

32. Outline the procedure in New York State. 

33. Describe the federal budget. 

34. Why did Liberty bonds depreciate ? 

35. Assuming competitive conditions, trace by means 
of diagrams the effect caused by the levy of a tax on a 
commodity produced under conditions of (a) constant cost; 
{h) increasing cost; and (c) decreasing cost. 

36. What is the effect on the distribution of wealth of 
public borrowing? 



CHAPTER XIX 

RECEIPTS AND EXPENDITURES OF THE 
FEDERAL GOVERNMENT 

I. The Principal Sources of Revenue. 2. Financial Transactions of 
1920, 3, War-Profits and Excess-Profits Tax. 4. The Federal In- 
come Tax. 5. The Estate Tax. 6. Internal Revenue Duties. 7. 
Details of Expenditures. 8. The Problem of the Debt. 9. Revision 
of Taxation. 10. Exercises. 

I. The Principal Sources of Revenue. — The tariff has 
been the steadiest contributor to the revenues of the fed- 
eral government. Before the passage of the Homestead 
Act in 1862, the sales of public lands, at times, brought in 
considerable revenue. This was particularly true in the 
years before the panic of 1837. The largest amount from 
public lands since the passage of the Homestead Act was 
$11,202,017.23, which was received in 1888. Internal 
revenue duties were resorted to during the Civil War, and 
large sums were raised. As soon as possible after the war, 
most of them were repealed. The ones on liquor and to- 
bacco and a few others were retained. In 1909 there was 
levied a tax on the net earnings of corporations, and the 
proceeds were included as internal revenue. The maximum 
amount from internal revenue after the Civil War taxes 
were repealed and before the levying of the tax on the 
incomes of corporations was $307,180,663.77 in the year 
1901. Of course, the coming of the Great War brought 
another resort to internal revenues. The maximum amount 
which has been received from customs tariff was $333,- 
683,445.03 in the year 1910. 

323 



324 Introduction to Economic Problems 

2. The Financial Transactions of 1920. — The following 
figures give a summary view of the financial transactions 
of the United States Government for the fiscal year end- 
ing June 30, 1920: 

FINANCIAL TRANSACTIONS OF THE UNITED STATES 
FOR THE FISCAL YEAR 1920' 

Net balance in general fund June 30, 1919 $1,251,664,827.54 

Receipts exclusive of the principal of the public debt. . 6,694,565,388.88 
Public-debt receipts 15,852,855,030.64 

$23,799,085,247.06 

Disbursements exclusive of principal of public debt. . $6,403,343,841.21 
Public-debt disbursements 17,038,039,723.62 

$23,441,383,564.83 
Net balance in general fund June 30, 1920 $357,701,682.23 

The large amount of the transactions in the public debt 
which appear as both receipts and disbursements is due 
to the use of short-time certificates of indebtedness. Some 
of the certificates, which mature at the time when big pay- 
ments are received from the income and excess-profits taxes, 
are paid off; but in general the maturing series is paid off 
by selling a new series. 

The receipts of the United States Government for the 
fiscal year ending June 30, 1920, will now be presented in 
greater detail, and some of the sources of revenue will be 
discussed. 

At once we are struck by the large proportion of the 
receipts which come from incomes and excess profits. 

3. War-Profits and Excess-Profits Tax. — This tax had a 
double purpose. In the first place it was thought that any 

' Report of Secretary of Treasury, 1920, p. 411. 



Receipts of the Government 325 

RECEIPTS OF UNITED STATES GOVERNMENT FOR 
FISCAL YEAR 1920 ^ 

Income and profits $3,956,036,003.60 

Estates of decedents 103,635,563.24 

Distilled spirits and alcoholic beverages 139,871,149.80 

Under provisions of prohibition Act 641,029.34 

Tobacco and manufactures 295,809,355.44 

Oleomargarine, renovated butter, mixed flour 3,811,872.65 

Bonds and stocks, future sales of produce 84,347,827.49 

Transportation 289,348,087.35 

Insurance 18,421,754.01 

Excise taxes on manufactures, producers and importers 216,146,750.07 

Excise taxes on consumers and dealers 109,199,188.42 

Corporations on capital stock . 93,020,420.50 

Brokers, amusements 9,913,280.85 

Admission to places of amusements, club dues 81,918,556.74 

Narcotics i,5i3.9i9-50 

Sales of condemned government property 3,045,492.81 

Total internal revenue $5,407,580,251.81 

Customs 322,902,650.39 

Miscellaneous revenue 960,966,422.38 

Panama Canal tolls 5,664,741.45 

Total ordinary revenue $6,694,565,388.88 

industries which profited as the result of war activities 
should be forced to contribute part of the profit to the ex- 
pense of carrying on the war; and in the second place, it 
was thought that those industries which were extremely 
profitable should contribute a large part of that profit to 
the government. The rates for the income of the year 
1918 were imposed as follows: First Bracket: 30 per centum 
of the amount of the net income in excess of the excess- 
profits credit and not in excess of 20 per centum of the 
invested capital. Second Bracket: 65 per centum of the 
amount of net income in excess of 20 per centum of the 
invested capital. Third Bracket: the sum, if any, by 
^Report of Secretary of Treasury, 1920, pp. 410, 601. 



326 Introduction to Economic Problems 

which 80 per centum of the amount of the net income in 
excess of the war-profits credit exceeds the amount of the 
tax computed under the first and second brackets. Per- 
haps an illustration may make the case clearer: 

EXAMPLE OF WAR-PROFIT AND EXCESS-PROFIT TAX 
ON INCOME OF A CORPORATION FOR 1918 

Average pre-war invested capital $2,000,000 

Average pre-war net income 500,000 

Invested capital for 1918 2,500,000 

Gross income, including taxable interest on Lib- 
erty bonds 5,500,000 

Deductions 4,800,000 

Net income 700,000 

WAR-PROFITS AND EXCESS-PROFITS TAX 
First Bracket: 

Income not over 20% of invested capital $500,000 

Deduct excess-profits credit : 

Specific exemption $3,ooo 

8% of invested capital 200,000 ^„, ^^^ 

^ 203,000 

Remainder $297,000 

Tax at 30% $89,100 

Second Bracket: 

Income over 20% of invested capital 200,000 

Tax at 65% 130,000 

Total tax under first two brackets $219,100 

Third Bracket: 

Income $700,000 

Deduct war-profits credit: 

Specific exemption $3,000 

Average pre-war income 500,000 

10% of increase in invested 

c^P't^l 50.Q»» 553,000 

Remainder $147,000 

80% of $147,000 117,600 

Tax under first two brackets 219,100 

Tax under third bracket 000 

$219,100 



Receipts of the Government 327 

The excess-profits tax has been probably the most se- 
verely criticised tax of all of the war expedients. It was 
productive during the war and during the boom in business 
which followed the closing of the war. It is an unsatis- 
factory tax in times of depression. There are many chances 
for injustice and inequality inherent in any tax which at- 
tempts to base the amount to be paid on calculations in- 
volving capital invested in the business and on net profits 
without control of the accounting of the businesses involved. 
According to the tax law a conservatively capitalized com- 
pany was penalized and a recklessly capitalized company 
was rewarded. Again, by paying large salaries some of the 
tax could be escaped. It was currently reported that many 
firms entered into extended and expensive advertising cam- 
paigns, hoping to escape some of the tax and perhaps build 
up an asset of good-will. The grave danger of a heavy 
profits tax is that it will discourage business enterprise. 
All business involves risks of loss. These risks will not be 
undertaken unless there is a chance for gain. If the excess- 
profit tax leaves but little above what could be obtained 
by investing his capital in securities, the business man may 
conclude that the game is not worth the candle. 

4. The Federal Income Tax. — Income is the ideal basis 
for taxation. However, there are many practical difficul- 
ties in the way of administering an income tax with rates 
as high as those in the federal income tax. The federal 
tax divides the net income up into various parts and taxes 
them at highly progressive rates. The table on next page 
gives the rates at their highest. 

Gross income includes all salaries, wages, returns from 
businesses, and all gains or profits. Among other things, 
it does not include proceeds of life-insurance policies paid 



328 Introduction to Economic Problems 



INCOME-TAX RATES FOR YEAR 1918 ON NET INCOME 



Income between Rate 

$ - $2,000 0% 

2,000- 5,000 6% 

5,000- 6,000 7% 

6,000- 8,000 14% 

8,000- 10,000 15% 

10,000- 12,000 16% 

12,000- 14,000 17% 

14,000- 16,000 18% 

16,000- i8,ooo 19% 

i8,ooa- 20,000 20% 

20,000- 22,000 21% 

22,000- 24,000 22% 

24,000- 26,000 23% 

26,000- 28,000 24% 

28,000- 30,000 25% 

30,000- 32,000 26% 

32,000- 34,000 27% 

34,000- 36,000 28% 

36,000- 38,000 29% 

38,000- 40,000 30% 

40,000- 42,000 31% 

42,000- 44,000 32% 

44,000- 46,000 33% 

46,000- 48,000 34% 

48,000- 50,000 35% 

50,000- 52,000 36% 

52,000- 54,000 37% 

54,000- 56,000 38% 



Income between Rate 

$56,000- $58,000 39% 

58,000- 60,000 40% 

60,000- 62,000 41% 

62,000- 64,000 42% 

64,000- 66,000 43% 

66,000- 68,000 44% 

68,000- 70,000 45% 

70,000- 72,000 46% 

72,000- 74,000 47% 

74,000- 76,000 48% 

76,000- 78,000 49% 

78,000- 80,000 50% 

80,000- 82,000 51% 

82,000- 84,000 52% 

84,000- 86,000 53% 

86,000- 88,000 54% 

88,000- 90,000 55% 

90,000- 92,000 56% 

92,000- 94,000 57% 

94,000- 96,000 58% 

96,000- 98,000 59% 

98,000- 100,000 60% 

100,000- 150,000 64% 

150,000- 200,000 68% 

200,000- 300,000 72% 

300,000- 500,000 75% 

500,000- 1,000,000 76% 

Over 1,000,000 77% 



to beneficiaries; gifts and bequests; interest on state, mu- 
nicipal, and some United States Government bonds; and 
compensation insurance. To get net income, deductions 
are made from gross income to cover business expenses, 
interest, most taxes, losses, worthless debts, depreciation 



Receipts of the Government 329 

on business property, and charitable contributions up to a 
limited amount. From net income, certain credits are 
allowed; namely, dividends from corporations which have 
paid the income tax, interest on certain obligations of the 
United States, $i,ooo for a single person, $2,000 for the head 
of a family, and $200 for each dependent under eighteen 
years of age. These exemptions were increased by the 
Revenue Act of 192 1, described in section 9 of this chapter. 

One injustice is in the favor of the farmers. The farmer 
gets a large part of his living from the farm and does not 
pay any income tax on it. 

The system of self-assessment gives a chance for dis- 
honest people to pay less than their fair share of the tax. 
As time goes on, there will probably develop an adequate 
use of information at the source for large items, but there 
will always be a chance to conceal numerous small items. 

The chief difficulty arises from the existence of tax-free 
securities, by the purchase of which the investor may escape 
the tax. One class of these securities is issued by the 
federal government itself. Bonds of the first Liberty loan 
are free of all tax. Bonds of the Federal Farm Loan Banks 
are also free of tax. The second great class of exempt se- 
curities consists of state and municipal bonds. The courts 
have consistently held that the federal government cannot 
tax such bonds. The tremendously high supertaxes make 
even a low return on a tax-exemptbondprofitable to the man 
whose income is large. Men who have large investments in 
business may not be able at once to convert them into tax- 
free investments, but the pressure is very great to do so. 

5. The Estate Tax. — This tax is usually called the inheri- 
tance tax. In one respect it is a good tax, as the recipients 
of the bequests probably think more of what they are get- 



330 Introduction to Economic Problems 

ting than what they are giving up. At first thought it 
would seem to be an easy tax to escape by gifts before 
death. However, the law taxes gifts within two years of 
death as bequests. And most men do not believe that 
they are going to die soon and do not like to give up the 
control of their fortunes. 
The present federal tax is on the net estate. 

Estate Tax of 1919 

Net estate of a resident is obtained by subtracting from 
the gross estate: 

(i) Expenses of funeral and administration claims and 
losses; support of dependents while estate is being settled. 

(2) Property on which federal estate tax has been paid 
within five years. 

(3) Bequest for public, charitable, and educational pur- 
poses. 

(4) An exemption of $50,000. 

RATES OF TAX ON NET ESTATE 

$I,500,00O-$2,O00,0O0 12% 

2,000,000- 3,000,000 14% 

3,000,000- 4,000,000 16% 

4,000,000- 5,000,000 18% 

5,000,000- 8,000,000 20% 

8,000,000-10,000,000 22% 

Over 10,000,000 25% 

Thus if the net estate were $1,000,000 the tax would be 
$51,500, made up as follows: 

I % on $50,000 $500 

2% on 100,000 2,000 

3% on 100,000 3,000 

4% on 200,000 8,000 

6% on 300,000 18,000 

8% on 250,000 20,000 

$51,500 



Up to 


$50,000 . . . . 


... 1% 


$50,000- 


150,000. . . . 


, . . . 2% 


150,000- 


250,000. . . . 


... 3% 


250,000- 


450,000 . . . , 


.... 4% 


450,000- 


750,000. . . . 


... 6% 


750,000-1 


,000,000. . . . 


... 8% 


1,000,000-1 


,500,000 . . . . 


...10% 



Receipts of the Government 331 

6. Internal Revenue Duties. — Taxes on Commodities and 
Transactions. — Most internal revenue taxes on commod- 
ities and documents are collected by means of stamps. 
For ease of supervision, the stamping is usually required 
to be done at the point in manufacture or trade where the 
goods are most concentrated. Before the war this system 
worked well with liquor and tobacco. Any one could tell 
whether the tax had been paid. As to documents, the pro- 
vision that they shall not be legal unless stamped has 
usually been effective in insuring the use of the stamps. 

The so-called luxury taxes and the tax on refreshments 
are less good from the administrative standpoint. The big 
stores undoubtedly keep accurate records and pay the tax. 
It is doubtful whether all of the small stores return all that 
they collect. There is no adequate check on the receipts 
or even on the number of stores that are supposed to make 
returns. 

The same is true of the tax on the admission to amuse- 
ments. In ordinary theatres and in league baseball, the 
financial arrangements require accurate accounts and 
probably the government gets what is collected. But it 
would be easy in the case of the small moving-picture 
house or in the case of the occasional entertainment to 
neglect to return all or part of the tax collected. 

7. Details of Expenditures. — ^We turn now to the details 
of the expenditures of the federal government. Of course, 
we recognize the unusual character of the year in question. 
Before the war the expenditures of the federal government 
amounted to about $1,000,000,000 a year; now the inter- 
est on the public debt is over $1,000,000,000 a year. 

The big items are for war and navy. Perhaps these will 
be reduced by disarmament agreements. The item federal 



332 Introduction to Economic Problems 

control of transportation will not be so large again, but will 
be present until all of the claims of the railroads, particu- 
larly for deferred maintenance, have been settled. 

DISBURSEMENTS OF THE FEDERAL GOVERNMENT 

FOR THE YEAR ENDING JUNE 30, 1920i 

Legislative establishment $19,327,708.72 

Executive proper 6,675,517.58 

State Department 13,586,024.42 

Treasury Department 322,315,627.43 

War Department 1,610,587,380.86 

Department of Justice 17,814,398.18 

Post-Office Department 50,049,295.07 

Navy Department 736,021,456.43 

Interior Department 279,244,660.87 

Department of Agriculture 65,546,293.14 

Department of Commerce 30,010,737.75 

Department of Labor 5,415,358.40 

United States Shipping Board 530,565,649.61 

Federal Control of Transportation 1,036,672,157.53 

War Finance Corporation 134,628,433.27 

Grain Corporation 350,328,494.70 

Other independent offices and commissions 59,469,305.17 

District of Columbia 19,987,898.41 

Interest on public debt 1,020,251,622.28 

Total 16,308,498,019.80 

Deduct unclassified repayments 4,399,847.00 

$6,304,098,172.82 

Panama Canal 11,365,714.01 

Purchase of obligations of foreign governments 421,337,028.09 

Purchase of Federal farm loan bonds 29,643,546.17 



$6,766,444,461.09 
Special deposit of War Finance Corporation 363,100,619.88 



Net ordinary $6,403,343,841.21 

* Report of Secretary of Treasury, 1920, pp. 410-41 1. 



Receipts of the Government 333 

8. The Problem of the Debt. — ^The problem confronting 
the secretary of the treasury is how to meet the floating 
indebtedness and the Victory notes, which it will be re- 
membered were made to run for only five years. The 
obligations were put in short-time form with the hope that 
the funds would be available to pay them off as they came 
due. The depression of 1920 will hamper the raising of 
sufficient revenue to retire them. 

The repaying of the Liberty bonds illustrates the evils 
of a fluctuating standard of value. The money was spent 
when prices were high. It will be repaid when prices are 
lower. The bondholder will gain and the government 
lose, in the sense that it will be harder to raise the taxes 
to pay the debt. In one sense, an internal debt is no bur- 
den to the country as a whole, since it merely means a 
redistribution of funds. What one group loses another 
group gains. The system of taxation followed will de- 
termine what classes within the country bear the burden. 
It is not inconceivable that future elections will be fought 
on the question of the taxation policy. The country which 
borrowed abroad must in the future pay back the loan. 
This means that the people of that country will have less 
to consume and the country which holds the bonds will 
have more to consume. 

After the Civil War there was agitation against the 
bondholders. The wide distribution of the Liberty loans 
would be a bar to the recurrence of such agitation. Un- 
fortunately, the Liberty bonds did not stay so widely dis- 
tributed. We may have trouble with those who paid par 
for their bonds and later sold them at a sacrifice. 

9. Revision of Taxation. — During war times the public 
will submit to heavy taxation. After the war, there al- 



334 Introduction to Economic Problems 

ways arises a demand for release from the burdens of the 
war taxation. The conflict in Congress was over the class 
which should bear most of the taxation. The agricultural 
bloc prevented much reduction in the surtaxes in the in- 
come-tax rates. They thought that they were preventing 
the shifting of the burden to the masses. 

In the income tax, no changes were made in the sur- 
taxes for the tax payable in 1922 on the income for 1921. 
The surtaxes for the income for 1922 and after were cut 
somewhat. The exemption for married persons was in- 
creased from $2,000 to $2,500 for those with incomes below 
$5,000, and the exemption for dependents was increased 
from $200 to $400 each. These changes apply to the in- 
come tax for 192 1, payable in 1922. 

The following table, which is for a married man claiming 
personal exemption but not exemption for dependents, 
shows the normal rates, surtax, and amount of tax on in- 
comes up to $1,000,000 for 192 1 and 1922 under the new law. 

The excess-profits tax was repealed to take effect Janu- 
ary I, 1922, so the tax will be collected on the profits for 
the year 192 1. In a sense it was replaced by increasing 
the rate which corporations are required to pay on their 
net income from 10 per cent to i2jE^ per cent, to take effect 
on the income of 1922. 

The tax of 8 per cent on passenger transportation and of 
3 per cent on freight transportation was eliminated after 
January i, 1922. Numerous small taxes, called nuisance 
taxes, were taken off. 

ID. Exercises. — i. Why has the United States derived 
so little revenue from its public lands ? 

2. Why were not internal revenue taxes used earlier in 
this country? 



Receipts of the Government 



335 



' Net Income 


Per Cent 
of Nor- 


Per Cent 
of Surtax, 


Per Cent 
of Surtax, 

1922 and 
Thereafter 


Total Tax, 


Total Tax, 
1922, and 




mal Tax 


1921 


1921 


Thereafter 


•3,000 


4 






$20 


$20 


4,000 


4 






60 


60 


S.ooo 


4 






100 


100 


6,000 


4 


I 




170 


160 


8,000 


8 


2 


I 


370 


340 


10,000 


8 


3 


I 


S90 


S20 


12,000 


8 


4 


2 


830 


720 


14,000 


8 


S 


3 


1,090 


940 


16,000 


8 


6 


4 


1,370 


1,180 


1 8,000 


8 


7 


S 


1,670 


1,440 


30,000 


8 


8 


6 


1,990 


1,720 


22,000 


8 


9 


8 


2,330 


2,040 


24,000 


8 


10 


9 


2,6go 


2,380 


26,000 


8 


II 


10 


3,070 


2,740 


28,000 


8 


12 


II 


3,470 


3,120 


30,000 


8 


13 


12 


3,890 


3.520 


32.000 


8 


14 


13 


4,330 


3.940 


34,000 


8 


IS 


IS 


4,790 


4.400 


36,000 


8 


16 


IS 


5,270 


4,860 


38,000 


8 


17 


16 


5,770 


S.34O 


40,000 


8 


18 


17 


6,290 


5. 840 


42,000 


8 


19 


18 


6,830 


6,360 


44,000 


8 


20 


19 


7,390 


6,900 


46,000 


8 


21 


20 


7,970 


7.460 


48,000 


8 


22 


21 


8,S7o 


8,040 


50,000 


8 


23 


23 


9,190 


8,640 


52,000 


8 


24 


23 


9,830 


9,260 


S4,ooo 


8 


2S 


24 


10,490 


9,900 


56,000 


8 


26 


2S 


11,170 


10,560 


58,000 


8 


27 


26 


11,870 


11,240 


60,000 


8 


28 


27 


I2,S90 


11,940 


63,000 


8 


29 


28 


13,330 


12,660 


64,000 


8 


30 


29 


14,090 


13.400 


66,000 


8 


31 


30 


14,870 


14,160 


68,000 


8 


32 


31 


15,670 


14,940 


70,000 


8 


33 


32 


16,490 


IS. 740 


72,000 


8 


34 


33 


17.330 


16,560 


74,000 


8 


3S 


34 


18,190 


17,400 


76,000 


8 


36 


35 


19,070 


18,260 


78,000 


8 


37 


36 


19,970 


19,140 


80,000 


8 


38 


37 


20,890 


20,040 


82,000 


8 


39 


38 


21,830 


20,960 


84,000 


8 


40 


39 


22,790 


21,900 


86,000 


8 


41 


40 


23,770 


22,860 


88,000 


8 


42 


41 


24,770 


23,840 


90,000 


8 


43 


42 


25,790 


24,840 


92,000 


8 


44 


43 


26,830 


25,860 


94,000 


8 


45 


44 


27,890 


26,900 


q6,ooo 


8 


46 


45 


28,970 


27,960 


98,000 


8 


47 


46 


30,070 


29,040 


100,000 


8 


48 


47 


31,190 


30,140 


130,000 


8 


52 


48 


61,190 


58.140 


300,000 


8 


S6 


49 


93,190 


86,640 


300,000 


8 


60 


SO 


161,190 


144,640 


500,000 


8 


63 


SO 


303,190 


260,640 


1,000,000 


8 


64 


SO 


663,190 


550,640 



' In computing the tax, personal exemption of $2,500 is allowed on incomes not in excess 
of $5,000, and $2,000 is allowed on incomes of $6,000 or over ,_ both under the new law. No 
allowance is made for credit for dividends or interest on United States obligations, if any, 
included in net income. Neither is there any allowance of any exemption for dependents. 
For incomes over $1,000,000 the rate of the normal tax is 8 per cent, the surtax for 1931 is 
65 per cent, and the surtax for 1922 and thereafter is 50 per cent. 



336 Introduction to Economic Problems 

3. Why do not people donate money to the government? 

4. From the report of the secretary of the treasury, or 
from the statistical abstract of the United States, draw 
diagrams showing the yearly receipts from customs and 
from internal revenue. 

5. What was the idea back of the excess-profits tax? 

6. What was the chief difficulty in assessing the excess- 
profits tax ? 

7. What was the incidence of the excess-profits tax? 

8. What is the purpose of the exemptions in the income 
tax? 

9. Figure the income tax paid on a net income for the 
year 1918 of $205,000, $340,000, $1,625,000, and $1,000,- 
000,000. 

10. How do people escape paying the federal income tax ? 

11. If the tax rate is progressive, which is fairer, to tax 
the estate as a whole or the separate bequests? Which is 
more productive ? 

12. Under the federal estate tax, upon whom would the 
burden really fall ? 

13. What were the principal internal revenue duties be- 
fore the war ? 

14. What are the difficulties in collecting the luxury and 
amusement taxes? 

15. Why do government expenditures never get back to 
pre-war figures? 

16. Should the war debt be paid quickly? at all? 

17. Should any payment on the principal of the debt be 
made in time of depression? 

18. Which of the war taxes should be repealed first? 

19. Are stock dividends income? 



CHAPTER XX 

RECEIPTS AND EXPENDITURES OF CITIES AND 

STATES 

I. The Expenditures of Various Government Bodies. 2. The Fi- 
nances of New York City. 3. The Receipts of New York City. 4. 
The Expenditures of New York City. 5. The Receipts and Expendi- 
tures of Philadelphia. 6. The Receipts and Expenditures of State 
Governments. 7. The General Property Tax. 8. Corporation Taxes. 
9. The Single Tax on Land — Modifications. 10. State Income Taxes 
— The New York Tax. 11. State Inheritance Taxes — The New York 
Tax. 12. Exercises. 

I. The Expenditures of Various Government Bodies. — 

In this chapter we shall study in some detail the finances 
of New York City as the largest city in the United States, 
and in less detail Philadelphia, as more typical of other 
cities in the country. We shall treat the states all to- 
gether, indicating the percentages of revenue received from 
various sources and the percentages which went for the 
various expenditures. 

First, we may compare the pre-war expenditures of the 
various governmental bodies. 

NET GOVERNMENTAL COST PAYMENTS, 1913 1 





Amount 


Per Capita 


National government 


$1,048,225,180 
505,399,448 

1,043,594,297 


$10.36 
505 

32.34 


State governments 


Governments of cities with over 30,000 
population 



> Financial Statistics of States, 1917, p. 32. 

The striking thing is the large expenditure of the cities 
and the relatively small expenditures of the states. 

2. Finances of New York City.— We may start with the 

controller's statement of receipts and expenditures. 

337 



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340 



Receipts of Cities and States 341 

The special accounts include numerous items, such as im- 
provement funds and revenues from city colleges. The 
largest single item is money received from the state for 
education. The second largest is receipts from sale of 
water. Corporate stock includes stock for water, rapid 
transit, docks, and assessments for street and park openings. 

Trust accounts cover pension funds, gifts, fines, and pen- 
alties held in trust, and uncalled-for wages. 

The next table gives more in detail the receipts, exclud- 
ing borrowing and special accounts. 

RECEIPTS OF NEW YORK CITY FOR YEAR ENDING 
DECEMBER 31, 1920 

Taxes on land and buildings $194,956,77344 

Special franchise taxes 6,284,748.37 

Taxes on real estate of corporations 5,057,149.10 

Personal property tax 31623,980.45 

Arrears of old taxes 5,936.81 

Total taxes $209,927,588.17 

Total fees $1,561,257.74 

Total interest 83,831.01 

Total licenses 362,053.50 

Total permits 287,538.25 

Total privileges 295,090.18 

Total rentals 38,545.88 

Special bank tax 5,724,160.30 

Mortgage tax 7,608,209.17 

Share of state income tax 12,469,255.74 

The licenses cover auctions, peddlers, amusements; and 
include marriage licenses. The permits issued were for 
golf, sewers, and drains. The privileges sold were conces- 
sions on bridges and in parks. The special bank tax is a 
tax on the shares of all banks. The special franchise taxes 



849 Introduction to Eeonomio Problems 

arise from the New York law which permits the taxation 
of franchises as real estate. The great disproportion be- 
tween the tax on land and buildings and personal property 
reflects somewhat the ease with which personal property 
can be concealed. 

We may next consider the appropriations in more detail. 
The total is less than is given in the controller's summary, 
because it does not include about nine millions appropriated 
for the county governments within New York City and 
about the same amount of tax paid to the state. 

APPROPRIATIONS FOR YEAR 1920 FOR NEW YORK 

CITY 

Board of Aldermen and City Clerk $302,840 

Board of Estimate and Apportionment 368,999 

Commission of Sinking Fund 3i890 

The Mayoralty 71.247 

Department of Finance 1,547,248 

City Chamberlain 69,995 

Law Department 1,030,493 

Department of Taxes and Assessment 640,281 

Board of Elections 2,129,915 

Municipal Civil Service 211,772 

Commissioner of Accounts 252,520 

Bureau of Weights and Measures 67,169 

Department of Licenses 195.703 

Department of Public Markets 209,785 

Board of Assessors 38,333 

Art Commission 7.526 

Examining Board of Plumbers 7.210 

Presidents of the Boroughs 14,843,881 

Department of Education 49,408,681 

City Colleges 1,460,986 

Teachers' Retirement 2,621,433 

Public Libraries 1,849,439 

Parks and Museums 4,727,622 



Receipts of Ciites and States S4S 

Police Department $24.591. 187 

Fire Department 13.186,753 

Armory Board 392.026 

Board of Standards and Appeals 38,810 

U. S. Volunteer Life Saving Corps 6,887 

Department of Health 4.729.832 

Department of Public Charities 7,497,561 

Board of Child^Welfare 2,084,492 

Hospitals 2,835,624 

Department of Water Supply, Gas, and Electricity 7.513.^50 

Department of Street Cleaning 13,163,524 

Charitable Institutions 8,149,388 

Department of Correction 2,331,214 

Department of Plants and Structures 3,432,416 

Department of Docks and Ferries 1,123,274 

City Courts 3,110,497 

Board of City Record 1,093,730 

Debt Service 74,8ii,539 

Miscellaneous 4,282,568 

Total $256,441,440 

The figures for the debt are of interest. 

Net Funded Debt held by public $1,034,544,694 

Temporary debt 103,125,083 

$1,137,669,777 

This debt is approximately as large as the debt of the 
federal government before the war. 

The figures for Philadelphia, Pennsylvania, probably rep- 
resent more nearly the situation of other cities than does 
New York City. 

5. Receipts and Expenditures of Philadelphia.^^ 

RECEIPTS OF PHILADELPHIA, PENNSYLVANIA, 1917 

General property tax $27,856,283 

Poll tax 75.038 

^U. S. Census, Financial Statistics of Cities, pp. 140-141. 



344 Introduction to Economic Problems 

Business tax $2,152,182 

Non-business license 125,872 

Special assessments 697,821 

Fines, forfeits, and escheats 74i7i7 

Subventions and grants 1,211,393 

Donations and gifts 8,466 

Pension assessments 243,670 

General departmental earnings 1,711,374 

Highway privileges 630,744 

Rents 4,774,996 

Interest 1,872,691 

Earnings of public-service enterprises 5.233,339 

$46,668,586 

Two of these items may need a little explanation. Sub- 
ventions consist mostly of state aid for education. General 
department earnings are for licenses and permits. 

The expenditures are given in the following table: 

OUTLAYS OF PHILADELPHIA, PENNSYLVANIA, 1917 1 

Legislative — Council and Board of Aldermen $106,334 

Mayor's Office 44.159 

Financial Department 1,223,494 

City Solicitor's Office 249,388 

Other executive departments 337,575 

Judicial branch 1,541,527 

Elections 933,242 

Care and rent of buildings 502,706 

Police Department 4,566,325 

Fire Department i ,447,069 

Militia 48,500 

Register of Deeds and Mortgages 281,825 

Inspection service 242,728 

Other protection to persons and property 246,241 

Conservation of health 689,569 

Sanitation 2,460,808 

'U.S. Census, Financial Statistics of Cities, 1917, pp. 141,200- 
207, 233-238. 



Receipts of Cities and States 345 

Highways $3,739,332 

Charities, Hospitals, and Corrections 3.737.554 

Education 8,461,718 

Recreation 1,451,500 

Miscellaneous 532,455 

General expenses 812,565 

Public-service enterprises 2,401,076 

Interest on indebtedness 5,206,451 

Outlays 18,031,387 

$59,345,528 

The meaning of most of these items is clear. The Finan- 
cial Department includes the treasurer, the auditor, and 
the force which has to do with the assessment and collec- 
tion of revenue. Other executive departments include the 
City Clerk, the City Engineer, the Board of Public Works, 
the Civil Service Department, the Department of Public 
Safety, and the Department of Public Buildings and 
Grounds. The judicial branch includes the courts, the 
coroner, the marshal, and the sheriff. Inspection service 
covers buildings, weights and measures, and boilers. Other 
protection to person and property means the fire-alarm 
system and pounds for dogs. Under sanitation comes 
sewers and the collection and disposal of refuse. High- 
ways include roadways and bridges, sprinkling streets and 
lighting them. Under the head of charities we find out- 
door poor relief, poor-houses, the care of children, general 
hospitals, the care of the insane, and the probation officers. 
General expenses cover pensions for the policemen, the 
firemen, the teachers, and the employees of the Health 
Department; also judgments and losses. The public-ser- 
vice enterprises are water-works, markets, and docks. The 
outlays cover any permanent additions to the property of 
the city. 



346 Introduction to Economic Problems 

6. Receipts and Expenditures of the State Govern- 
ments. — In our study of the state receipts and expendi- 
tures, we will take the percentage distribution rather than 
the actual figures, since the percentage figures are easier 
to grasp. The figures are for all of the states of the United 
States. 

PERCENTAGE DISTRIBUTION BY PRINCIPAL CLASSES 
OF REVENUE RECEIPTS OF ALL STATES FOR 1917 ' 

Per Cent 

Property taxes 53 . i 

Special property taxes 2.6 

Poll taxes 0.4 

Business and non-business licenses 22 . 3 

Special assessments and special charges for outlays 0.6 

Fines, forfeits, and escheats 0.4 

Subventions, grants, donations, and pension assessments 2.1 

Earnings of general departments 12.0 

Highway privileges, rents, and interest 6.0 

Earnings of public-service enterprises 0.5 

We may indicate what is included in the various classes 
before considering the merits of the separate taxes. Prop- 
erty tax means the general property tax. The special 
property taxes include taxes on inheritances, corporations, 
savings-banks, mortgages, secured debts, telegraph and 
telephone companies, etc. Business taxes include licenses 
on the liquor trafiic, taxes on insurance companies, taxes on 
corporations, taxes on incomes of individuals. The most 
important non-business licenses are on motor vehicles and 
permits for hunting and fishing. Special assessments are 
usually in connection with parks or highways. Fines come 
as the result of activities of courts; forfeits come in connec- 

^Financial Statistics of States, 1917, p. 71. 



Receipts of Cities and States 347 

tion with bonds given to guarantee the performance of 
contracts. Escheats are funds received from the sale of 
property whose owners cannot be located. Subventions 
are principally the payments received from the federal gov- 
ernment for education, highways, and experiment stations. 
Donations are usually for schools or hospitals. Earnings 
of general departments are mostly fees for services ren- 
dered, such as issuing and filing of legal papers, boiler in- 
spection, moving-picture censorship, and regulation of 
various trades. Highway privileges are enjoyed and paid 
for by some public-utility companies. The public services 
include docks, wharfs, ferries, canals, and irrigation. 

HOW THE STATES SPENT THEIR MONEY IN PERCENTAGES 
OF THE TOTAL EXPENDITURES OF 1917» 

Per Cent 

General officers, executive, legislative and judicial , 10.7 

Protection to person and property 6.1 

Development and conservation of natural resources 4.5 

Conservation of health and sanitation 2.6 

Highways 7.9 

Charities, hospitals, and corrections 24.3 

Schools 37.5 

Libraries 0.3 

Recreation 0.3 

General 4.9 

7. The General Property Tax. — ^This tax may be called 
the backbone of the revenue systems of the states and 
cities. It is also the chief problem of public finance. All 
taxes are supposed to be paid from income. The amount 
of property held is taken as an indication of income. It is 
a good indication of income in a primitive state of society 

1 Financial Statistics of States, 1917, p. 96. 



348 Introduction to Economic Problems 

with no credit instruments and no salaried people. In 
such a society the property is tangible, and the assessors 
do not have much difficulty in finding the property. In 
our modern situation, with its mortgages, corporate stocks 
and bonds, and government bonds, it is practically impos- 
sible to find the property if the owner wishes to conceal it. 
So, in many cases, the tax degenerates into a tax on tangi- 
ble personal property and the intangible personal property 
of the very conscientious. Because most people do not 
report all of their personal property, the tax rate must be 
very high. Thus, we have the essentially immoral situa- 
tion of a tax system that penalizes honesty and rewards 
dishonesty. Besides this fault in administration, there is 
the fundamental objection that in our present organization 
with its many people working for salaries, the amount of 
property held is no test of income. Especially is this true 
in New York City, where a small proportion of people own 
their own homes, and many a family on a salary spends it 
all and has little property except furniture and clothes. 
It is better to separate the real estate from the personal 
property and tax each at a different rate. Iowa found 
that more revenue was received from personal property 
when a tax oi }4 oi i per cent was levied on it directly 
than when the attempt was made to collect a tax of around 
2 per cent on it under the general property tax. 

8. Corporation Taxes. — Many corporation taxes are the 
result of anti-corporation sentiment. People fail to dis- 
tinguish between charters which permit persons to become 
a corporation and those grants which give special and ex- 
clusive privileges. 

When the corporation is singled out for tjixes not applied 
to all individuals, the tax is usually in the form of a license 



Receipts of Cities and States 349 

or payment for the permission to do business within the 
state. In this form it is possible to reach corporations 
chartered in other states. Many puzzling problems, arise 
in connection with the taxation of corporations, such as 
railroads which have property and do business in several 
states. How shall the earnings be apportioned among the 
states for taxation? Indeed, there is frequently also a 
problem of apportioning the total taxes collected among 
the counties and cities within the state. 

Sometimes the corporations are taxed on their capital 
stock. This disregards the question of the profitableness 
of the business and the question of over and under capital- 
ization. If earnings are taxed, fairness demands that the 
tax be on net earnings, but expedience and ease of admin- 
istration often results in taxing gross earnings. This is an 
unfair burden on the businesses with small profit and rapid 
turnover. 

9. The Single Tax on Land.^ — Henry George was a 
printer in California at the time of great speculation in 
land. He was greatly impressed by the growth in the 
value of land. He held that this growth was due to social 
causes, and yet under our present system individuals got 
the benefit of the increase in value. This increase is what 
is meant by the unearned increment. As the result of his 
observations and study he published a book called Prog- 
ress and Poverty. The book is written in a charming 
style and is actuated by a real desire to help humanity. 
We may find a great deal of fault with Henry George's 
analysis, but none at all with his spirit. The problem as 
he sees it is why poverty persists in spite of progress. He 
believed that all of the ills of society are due to our system 
of landholding. So the solution is simple. If we take by 



350 Introduction to Economic Problems 

taxation all of the economic rent of all land, society will 
lose all of its ills. No other taxes were to be levied. This 
universal-panacea idea has been a great help in propaganda, 
but rather a hindrance to those people who doubt whether 
only one thing is wrong with society. 

Our first objection to the single tax is that it involves 
confiscation. If you take away the economic rent of a 
piece of land as a tax, you have really taken the owner- 
ship. Confiscation of any sort is bad, because it takes 
away the feeling of security, which is one of the essential 
conditions for economic enterprise. 

Second, Henry George had a simple belief that in some 
miraculous way the amount of economic rent would always 
be sufficient to carry on the government. Most econo- 
mists would agree that ordinarily as population increases 
the amount of rent also increases, but they would be slow 
to believe that the increase would be just what was needed 
for the government. Rents fell in England in the nine- 
teenth century as the result of the opening up of our Mid- 
dle West, Canada, and Argentina. At the same time pop- 
ulation was increasing in England. The British Govern- 
ment would have been in great difficulties if it had been 
depending on the single tax. 

Third, our idea of justice in taxation requires that each 
should contribute according to his ability. Yet the single 
tax would reach only the landowners. 

Fourth, all lands do not increase in value. The subways 
in New York City increased the value of down-town prop- 
erty and the property in the sections made available for 
residence, but they decreased the value of certain sections 
in between. The development of the Middle West caused 
m ny New England and New York farms to be abandoned. 



Receipts of Cities and States 351 

If the state takes the unearned increment, should it not 
compensate for the unearned decrement? 

Modifications of the Single Tax. — ^At the present time, 
many so-called single taxers are simply people who believe 
that an increasing burden should be put on land in taxa- 
tion. Some experiments have been tried in taxing the in- 
crement in the value of land. A considerable number of 
German cities starting about 1905 tried such a tax. The 
Imperial German Government adopted a tax of this kind 
in 191 1. It is retroactive, since the increment is figured 
from the last sale, or from January i, 1885, whichever is 
the later. A yearly percentage is added, which is sup- 
posed to compensate for the rise in the general level of 
prices. No provision is made to protect the government 
in the case of falling prices. The tax takes from 10 per 
cent to 30 per cent of the increment, depending on the per- 
centage of increase in value. The rates are subject to a 
deduction of i per cent for each year of ownership. 

The famous Lloyd George Budget, which resulted in 
modifying the powers of the House of Lords in England, 
included an increment land tax. It avoids the charge of 
confiscation by taxing only the increment after April 30, 
1909, the time the tax was proposed. It is levied on the 
increase in value of the site. Agricultural land is not 
included. The tax is 20 per cent of the increment above 
10 per cent. To administer the law required that all 
lands subject to the tax be valued as of April 30, 1909. 
This work was so expensive and the returns from the tax 
so small that the collection of the tax was suspended dur- 
ing the war. 

It is probable that in the United States, with our general 
property tax, we have succeeded in getting more of the 



352 Introduction to Economic Problems 

unearned increment of land than either Germany or Great 
Britain. 

lo. State Income Taxes. — For many years it was thought 
that states could not utilize the general income tax suc- 
cessfully. Many experiments with the tax had been tried 
and failed. 'J'he administnilion was usually local, and 
when the taxpayers did not report their incomes, the local 
assessors did not enforce the penalties. Again, the failure 
to assess intangible personal property under the general 
property tax was supi)osed to show the impracticability of 
the income tax. 

Recently, some states have introduced the income tax 
with considerable success. Much of this success is due to 
the development of state tax administration to control and 
unify the local administration. Wisconsin in 191 1 intro- 
duced the first of the newer state income taxes. The state 
attempts to tax the incomes of individuals and corpora- 
tions which are earned or are derived from sources within 
the state. I'rojx'rty whose income has paid income tax is 
exempted from the property tax. For single persons the 
exemption is $800; for married $1,200, with $200 for each 
dependent child. The first $1,000 of taxable income of 
individuals is taxed i per cent. The rate rises to 6 per 
cent on the amount over $1 2,000. C'()rj)()rations pay 2 per 
cent on the first $r,ooo and 6 per cent on the income over 
$6,000. 

The New York Income Tax. — ^This tax took efl"ect in 1920 
on the income of 1919. It follows the federal income tax, 
with variations due primarily to differences in law about 
exemptions. Thus, the New York State law docs not ex- 
emj)t from taxation dividends on stock as the federal law 
does. The personal exemptions are $1,000 for single. 



Receipts of Cities and States 353 

$2,000 for married, plus $200 each for dependents. The 
amount above the exemptions and the deductions is taxed 
I per cent on the first $10,000, 2 per cent on the next 
$40,000, and 3 per cent on the amount over $50,000. 

An interesting feature of the law is the effort to tax the 
earnings of non-residents. Many people who work in New 
York City live in New Jersey and Connecticut. The New 
York law requires non-residents to pay on the income from 
property in New York, or business conducted in New 
York, or from services rendered in New York, and gives 
them the same exemptions as residents of New York. 

II. State Inheritance Taxes.— The inheritance tax is 
particularly well adapted to the states because the admin- 
istration of the estate of the deceased is in the hands of the 
state courts. No transfer of the property can be made 
without the consent of the court; so none of the estate can 
escape taxation. The theory is that the tax is on the 
transfer and that the state could, if it wished, take all of 
the property. 

One great evil has arisen in connection with state in- 
heritance taxes. The states, in their greed, try to tax any 
estate on any pretext. Thus, the state in which the de- 
ceased lived will wish to tax the whole amount of the be- 
quests. Then the state in which any property is situated 
will insist on getting a tax on that property. The state in 
which the evidence of property (such as stocks and bonds) 
is located, often in a safe-deposit vault, may demand a 
tax. Thus, because of lack of comity among the states, 
one estate may be subject to unjust multiple taxation. 

The New York Inheritance Tax. — 'This is a tax on the 
various bequests as distinguished from the federal tax, 
which is on the estate as a whole. Bequests for religious 



554 Introduction to Economic Problems 

and charitable purposes are not taxed. The rates are pro- 
gressive in two senses; they increase with the size of the 
inheritance, and with the remoteness of the relationship. 

Bequests to father, mother, husband, wife, or child are 
exempt to $5,000; i per cent is charged on the first $25,000 
above the exemption; 2 per cent on the next $75,000; 3 per 
cent on the next $100,000; and 4 per cent on all over that 
amount. 

An exempted amount of $500 is allowed in bequests to 
brothers, sisters, wife, or widow of son, husband of daugh- 
ter, or one treated as a child. The rates on bequests above 
the exemption are 2 per cent on the first $25,000, 3 per 
cent on the next $75,000, 4 per cent on the next $100,000, 
and 5 per cent on the balance. 

An exemption of $500 is allowed in bequests to non- 
relatives. The rates above the exemption are much higher 
than in the other cases. They start with 5 per cent on the 
first $25,000; then 6 per cent on the next $75,000; 7 per 
cent on the next $100,000; and 8 per cent on the balance. 

The New York law applied to non-residents in so far as 
they bequeath real property situated within the state and 
shares in New York corporations. 

12. Exercises. — i. Why do states spend so much less 
than the cities and the federal government? 

2. What is the chief source of revenue of New York 
City? of Philadelphia? 

3. What are the five greatest groups of expenditure for 
New York City? for Philadelphia? 

4. What classes of taxes yield the most revenue for the 
states? 

5. What are the chief expenditures of the states? 

6. What is the objection to the use of property as a 
measure of ability to pay taxes ? 



Receipts of Cities and States S55 

7. What happens to personal property under the general 
property tax? 

8. Which is the fairer basis fo taxing corporations, 
gross or net earnings? Which is the more easily admin- 
istered ? 

9. Which is the fairer basis for taxing corporations, capi- 
tal, or earnings? 

10. Should a corporation be allowed to deduct its bonded 
indebtedness from its valuation? 

11. Discuss the market value of stocks and bonds as a 
basis for taxing corporations. 

12. What is the fairest way to tax corportions with 
property in more than one state ? 

13. What is the objection to any single tax? 

14. Does the single tax follow the benefit or the ability 
theory of justice in taxation? 

15. What is the objection to taking the past unearned 
increment in the value of land ? 

16. What provision does the single tax make for the 
unearned decrement ? 

17. Supposing that prices rise as the result of monetary 
inflation, is there any real unearned increment ? 

18. Indicate the chances for double taxation in state in- 
heritance taxes. 

19. From the standpoint of ease in administration, which 
state should tax inheritances? 

20. Why does New York state tax the earnings of resi- 
dents of New Jersey who work in New York ? 



INDEX 



acceptances, 282 

Addyston Pipe case, 255 

advertising, 24 

agricultural productivity of vari- 
ous countries, 14 

agriculture, 11; persons engaged 
in, II 

amalgamations, 244 

American Federation of Labor, 
112 

American Tobacco Company, 244- 
48; anti-trust case, 256; disso- 
lution of, 257 

anti-trust laws, Kansas, 251; New 
York, 252; Sherman, 253 

appropriations of New York City, 

342-43 
arbitrage, 276 
arbitration, 122-23 
assembling, 21 
assumption of risk, 154 
attitude toward conclusions, 6 
auctions, 51, 54 

balance of international payments, 
273; tables of items for the 
United States, 273-74 

bankers' acceptances, 282 

Barker, J. Ellis, 10 

benefits of the Federal Reserve 
System, 92 

bill of lading, 190-91 

Board of Trade, Chicago, 25 

Bogart, E. L., 18 

boiler insurance, 143 

bonds on the stock exchange, 39 

boycott, the, 119 



Bradstreet's, 59 

Brimson case, 204 

Brindell, Robert P., 121 

British system of unemployment 

insurance, 168-69 
brokers, 50-51 
Brown v. Walker, 204 
budget, the, 313-14; advantages, 

314-15; the federal, 316-17; 

estimates for 1922 and 1923, 

320; New York City, 315; New 

York State, 316 
business management, 18 
business problems, 2 
butter market reports, 47-48 

California Fruit Growers' Ex- 
change, 50 
canals and canalized rivers, 174 
canned fruit market reports, 44-45 
capital of Federal Reserve Banks, 

81-82 
cars, railroad, passenger, 177; 

freight, 177-78 
catalogue houses, 49 
Central Pacific Railroad, 183 
certificates of indebtedness. United 

States, 78 
chain stores, 41-42 
check collection system, 79-81 
Chicago Board of Trade, 25 
child labor regulation, 131; age, 

132; hours, 131-32 
classification of freight, 185-86 
Clay, Henry, 293 
Clayton Act, 231, 258 
closed and open shop, 120 
cloth market reports, 45-47 



357 



358 



Index 



coal production, by countries, 9; 
per person, 10 

coal supplies, 9 

coastwise shipping, 193 

coercing middlemen, 234 

colonial preference, 302-03 

collection system, check, 79-81 

collective bargaining, 113 

combinations, common law con- 
cerning, 240-41; forms of, 241 

Commerce Court, 205 

commission houses, 49 

commodities clause, 210 

common law concerning combina- 
tions, 240-41; defenses, 153-54 

Commons and Andrews, 136, 163, 
165, 167 

company stores, 43 

competition, definition, 230; rail- 
road, 183 

compulsory arbitration, 123 

conciliation, 122-23 

conclusions, attitude toward, 6 

contributory negligence, 153 

Control of Trusts, Chap. XV 

co-operative marketing, 49-50 
stores, 42 

corporation taxes, 348 

correctives of the exchanges, 275- 
76 

Counselman v. Hitchcock, 204 

crises, mitigating, 67-70 

crisis, 66-67 

cycles, course of, 58; Mitchell's 
theory of, 60-67 

Cycles in Trade and Industry, 
Chap. IV 

debt, problem of the federal, 333 
debts, government, before and 

after the war, 308 
deceiving consumers, 232 
democracy in industry, 1 1 1 
department stores, 42 
depression, 67 
development of stresses, 64-65 



discount policy of the Federal Re- 
serve Board, 90-91 
discriminations in foreign trade, 

301 
distribution of wealth, 94 
dividends, life insurance, 149 
division of labor, international, 

263-64 
dollar exchange, 280 
dumping, 300 

Eckel, E. C, 9 

economic problems, defined, I; 
and business problems, 2; and 
the war, 5; the study of, i 

economist, the, difficulties of, 4; 
joys of, 5 

Engels, Frederick, 97 

engine, the railroad, 176-77 

employers' associations, 121-22 

employer's liability laws, 154 

Erie Canal, 179 

Esch-Cummins Law, 221 

estate tax, federal, 329; rates, 330 

excess-profits tax, 324-27 

exchange rates with countries on a 
paper standard, 277; on a silver 
standard, 278 

exchanges, the, effect of the war 
on, 280 

ex parte Young Case, 214 

expenditures, government, 312; of 
the federal government, 331-32; 
of Philadelphia, 344; of state 
governments, 346; of various 
governmental bodies, 337 

export tax argument against pro- 
tection, 294 

facts in economic problems, i 
farm products, marketing, 24 
federal and state regulation of 

commerce, 212-16 
Federal Reserve bank notes, 88 
Federal Reserve Banks, capital, 

81-82; check collection system, 



Index 



359 



79-81; reserve ratios, 89; ser- 
vices for the government, 84; 
surplus, 82-83 

Federal Reserve Board, discount 
policy, 90-91 

Federal Reserve notes, 86-87 

Federal Reserve System, benefits 
of, 92; operations of. Chap. V; 
weekly statement, 72-73 

Federal Railroad Control Act, 219 

Federal Trade Commission, 259; 
Act, 258; and unfair competi- 
tion, 231-32 

federations, labor unions, 1 12-13 

fees, 306 

fellow-servant doctrine, 154 

financial transactions of 1920, 324 

financing, 22 

Finlay, J. R., 9 

fire insurance, 141-43 

foreign exchange, demand for and 
supply of, 269; meaning of, 265- 
66; quotations, 266-69 

Foreign Trade and Foreign Ex- 
change, Chap, XVI 

forest area of various countries, 1 5 

Fourier, F. M. C, 95-96 

free trade vs. protection, 288 

freight cars, 177-78 

freight classification, 185-86; tar- 
iffs, 188-90 

Fureuseth, Andrew J., 121 

general property tax, 347 

Ghent system of unemployment 
insurance, 167 

gold exchange standard, 278 

gold movements, regulation of, 
279 

gold points, 271-73 

gold settlement fund, 72 

Gottlieb, L. R., 308 

government borrowing, 307-09 

government ownership of rail- 
roads, 198-201; advantages, 
199; evils, 200 



Government Regulation of Rail- 
roads, Chap. XII 

government, services for, Federal 
Reserve Banks, 84 

grading, 22 

grain market, Chicago, 28 

groceries, retail dealers in, 41-43 

Hamilton, Alexander, 291 

Haney, L. G., 250 

hazards of industry, 162-63 

health insurance, 161-65; in Eng- 
land, 164; in Europe, 163-65 

hedging, 26, 27 

Heubner, S. S., 142 

holding company, 243-44 

home market argument for pro- 
tection, 293 

horses in various countries, 12 

hours of labor, 109-10; for women, 
134; regulation of men's, 136 

Illinois Central case, 205 

income tax, federal, 327; rates for 
1918, 328; rates for 1921 and 
following, 335; of New York 
State, 352 

Industrial Relations Court, Kan- 
sas, 123-24 

infant industry argument for pro- 
tection in the general form, 291 ; 
in the particular form, 296 

inheritance tax of New York State, 

353-54 
inheritance taxes, state, 353 
injuring competitors, 234-36 
inland water transportation, 192 
insurable risk, the, 140-41 
insurance, boiler, 143; fire, 141- 
43; functions of, 139; health, 
161-65; invalidity, 166; life, 
144-50; marine, 143; old age, 
166; social, need for, 152-53; 
title, 143; unemployment, 167- 
69 



360 



Index 



interest rates, 40-41 

internal revenue duties, 331 

internal transportation, develop- 
ment in the United States, 173- 
75 

Interstate Commerce Act, pro- 
cedure, 203-05; scope, 202 

Interstate Commerce Commission, 
powers, 202-03 

I. C. C. V. Ala. Midland Railway, 
209 

invalidity insurance, 166 

investment, life insurance and, 
149-50 

iron market reports, 51-53; pro- 
duction of pig, 16 

Jenks, J. W., 241 

Kansas anti-trust law, 251 
Kansas Industrial Relations 

Court, 123-24 
Kentucky and Indiana Bridge 

Case, 203 
Knight Case, 254 

labor and the war, 124-27 

Labor Organizations, Chap. VII 

land in cultivation, 11 

law of public callings, 214 

Legal Regulation of the Condi- 
tions of Employment, Chap. 
VIII 

Lehigh Valley Case, 210 

Life and Property Insurance, 
Chap. IX 

life insurance, 144-50; and in- 
vestment, 149-50; dividends, 
149; calculation of premium, 
144-50 

locomotive, early development, 

175 
long and short haul clause, 208-10 
L. and N. Case, 209 
lumber, 15 



mail-order houses, 42 

manufactures, 15; power in, 16 

marine insurance, 143 

market reports, butter, 47-48; 
canned fruit, 44-45; cloth, 45- 
47; iron, 51-53; rice, 48 

Marketing, Chap. Ill; co-opera- 
tive, 49-50; farm products, 24; 
in foreign countries, 54-55; 
problem of, 20; securities, 31 

markets, public, 43 

Marx, Karl, 96 

Maximum Freight Rate decision, 
207 

McDufifie, George, 294 

men's labor regulation, 136; hours, 
136-37 

merchant marine, 192-93 

mergers, 244 

Michigan Salt Association, 241 

middleman, the functions of the, 
21 

mining, 9 

Minnesota Rate Case, 215 

mint pars of exchange, 271 

misuse of government protection 
and public utilities, 236 

Mitchell, Wesley C, 61 

money rates, 40-41 

Moody, John, 254 

Moore, H. L., 59 

moral hazard, the, 141 

mortality table, American Experi- 
ence, 144 

Munn V. Illinois, 213 

Munro, W. B., 315 

New Jersey, Seven Sisters Laws, 

257 
New York anti-trust law, 252 
New York Central Railroad, i8t- 

82 
New York Stock Exchange, 32 
night work for women, 134-35 
Northern Securities Case, 212 



Index 



361 



North River Sugar Refining Com- 
pany Case, 243 

occupational risks, 153 

Official freight classification. 186- 

87 

old-age insurance, 166 

old-age pensions in England, 166 

open and closed shop, 120 

"open door," 303 

open market transactions, 76 

organized speculation, 54 

Owen, Robert, 96 

ownership vs. regulation of rail- 
roads, 198-201 

packing, 22 

Paish, George, 273 

Panama Canal, 195-96; traffic, 

195 
panic, 66-67 
passenger-cars, 177; rates, 192; 

service, 190 
payments of New York City, 340 
Peick, v. C. & N. W. Ry., 214 
Pennsylvania Railroad, 182 
periodicity in business, 58-59 
picketing, 1 18-19 
Pittman Act, 78 
pools, 241-42; railroad, 211 
power in manufactures, 16 
Productive Capacity, Chap. II; 

effect of war on, 18; factors in, 

8 
prohibited employments for wo- 
men, 135 
propaganda, 4 
prosperity, 61-64 
protective tariffs, 288; argued 

unconstitutional, 294 
Public Finance, Chap. XVIII; 

scope, 306 
public markets, 43 
public prices, 307 
public service commission in New 

York, 217-18 



rail, development of railroad, 175- 
76 

railroad competition, 183; freight 
tariffs, 188-90; mileage in the 
United States, 179; pools, 211; 
rate theories, 184-85; rate regu- 
lation, 205-08; valuation, 224- 

25 
railroads and the war, 2 1 8-2 1 ; 

passenger service and rates, 190; 

the darker side, 181; the ro- 
mance of, the, 180-81 
railways, statistics in various 

countries, 17 
rate theories, railroad, 184-85 
raw material merchants, 54 
Reading R. R. Co v. Pa., 213 
rebates railroad, 206 
Receipts and Expenditures of 

Cities and States, Chap. XX 
Receipts and Expenditures of the 

Federal Government, Chap. 

XIX 
receipts of New York City, 338- 

39, 341; of Philadelphia, 343; 

of state governments, 346 
reciprocity treaties, 302 
regulation of conditions of em- 
ployment, reasons for, 129; of 

railroads, demand for, 198; of 

railroad rates, 205-08 
reserve ratios. Federal Reserve 

Banks, 89 
responsibility for accidents under 

the common law, 153-55 
retail dealers in groceries, 41-43 
retailers, 43 

retail-wholesale stores, 43 
revenue, federal, sources of, 323; 

sources of public, 306 
revenue tariffs, 287 
rice market reports, 48 
Riggs, E. G., 103 
Ripley, W. Z., 185, 241 
risk, assumption of, 22 
roads and turnpikes, 1 74 



362 



Index 



Rochester Labor Agreement, 
Men's Clothing Industry, 113- 
17 

safety, 129-30 

safety devices on railroads, 1 78 
salesmanship, 24 
sanitation, 129-30 
Schwab, Charles M., 120 
securities, marketing, 31 
security and continuity of employ- 
ment, IIO-II 
selling, 23 
Seven Sisters Laws of New Jersey, 

257 

Sherman Anti-Trust Law, 253; 
applied to railroads, 211-12; 
early effects, 254-55; later de- 
cisions, 255-57 

ships, tonnage of merchant, 17 

Shreveport Rate Cases, 216 

single tax on land, 349 

Skelton, O. D., 95, 99, 100 

Smith, J. Russell, 15, 16 

Social Circle Case, 209, 214 

Social Insurance, Chap. X; need 
for, 152-53 

Socialism, Chap. VI; theoretical 
basis of, 96-99; Utopian, 95-96 

socialist criticism of the present 
order, 99-100; party, 103-05; 
party platform, 103-05; pro- 
posals, 102-03; vote for presi- 
dent, 103 

sorting, 22 

specialty houses, 48-49 

speculation, 26; in stocks, 33; 
organized, 54 

Standard Oil Company Case, 255; 
dissolution of, 256 

state and federal regulation of 
commerce, 212-16 

statement, weekly, of the Federal 
Reserve System, 72-73 

state railroad commissions, 216- 
18; railroad regulation, 216-18; 



regulation of trusts, difficulties, 

253 

Stevens, W. S., 251 

Stock Exchange, Clearing Corpor- 
ation, 34-35; New York, 32; 
transactions, 36-37 

stock speculation, 33 

storage, 21 

strikes, 1 17-18 

Study of Economic Problems, 
Chap. I ; reasons for, 3 

surplus. Federal Reserve Banks, 
82-83 

tariff, arguments used, 290-98; 
and debts owed us by Europe, 
301; Commission, 299; bill, 
course of, 288-89; definition, 
285; effect on imports, 286; 
history in the United States, 
290-98; political evils of, 290; 
present discussion, 299; pro- 
tective, 288; revenue, 287; tech- 
nical terms of, 285-86 

Tariffs and Foreign Trade Poli- 
cies, Chap. XVII 

tax, the general property, 347; 
the single, on land, 349 

taxation, federal revision of 192 1, 
333-34; incidence, 311; justice 
in. 309; rates, 310 

taxes, 306; corporation, 348; state 
income, 352; state inheritance, 

353 
technic of railroad transportation, 

175-79 

title insurance, 143 

tonnage, steam of various coun- 
tries, 195 

trade acceptances, 75-77 

trade based on differences of eco- 
nomic development, 264; based 
on natural differences, 264; 
based on specialization, 265 



Index 



363 



trade, foreign, aid by banks, 92 
trade union leadership, 120-21 
trade unions, aims of, 109-11 
trafjfic through the Panama Canal, 

195 
Transportation, Chap. XI, 16, 23; 
and economic organization, 172- 
73; development of internal, in 
the United States, 173-75 
trust in the legal sense, 242-43 
Trust Problem, Chap. XIV 
trusts, attitude of public toward, 
250; causes for growth of, 238- 
39; difficulties in regulating, 
260; evils of, 250-51; minor 
causes for growth of, 239-40; 
state legislation against, 251-53 
truth vs. propaganda, 4 
Turner, J. R., 72, 97, 107, 238, 
277. 295 

unemployment insurance, 167-69 

Unfair Competition, Chap. XIII; 
description, 231; in foreign 
trade, 301 

union label, the, 119 

Union Pacific and Southern Pa- 
cific Case, 212 

Union Pacific Railroad, 183 

unions, types of, 111-12 

U. S. et al. v. A. T. & S. F. Ry., 
210 

United States Steel Corporation 
Case, 257 

United States v, Deleware and 
Hudson Railroad, 210 

U. S. v. Joint Traffic Assn., 212 



U. S. v. Trans Missouri Freight 

Assn., 211 
Utopian socialism, 95~96 

Van Hise, C. R., 16 

Wabash etc. R. R. Cos, v. Illinois, 

214 
Wage bargain, 107; labor the long 

factor, 107-08; labor the short 

factor, 108-09 
wages argument for protection, 

295 

Walker, R. J., 294 

war argument for protection, 293 

war, effect on the exchanges, 280 

War Labor Board, 124 

war profits tax, 324-27 

war, the, effect on productive 
capacity, 18 

war and economic problems, 5 

war and organized labor, 124-27 

war and shipping, 193-95 

war and the railroads, 218-21 

water transportation, inland, 192 

waterways and trails, 173 

Webb Act, 54-55 

wheat production, 13 

wholesale branches, 51; consump- 
tion, 51; markets, 44-48 

wholesalers general, 48; types of, 

44 
Williams, J. W., 274 
Willoughby, W. F., 314 
women's labor regulation, 134-35; 

hours, 134; night work, 134-35; 

prohibited employments, 135 
workmen's compensation laws, 

155; New York state, 155-61 



